Course Description

Decisions made by institutions of the State on public debt, spending, and taxation have ramifications for our collective as well as individual outcomes. Public debt management has to balance multiple considerations – price stability, potential crowding-out of private spending and investment, and capacity for public spending. Constraints on budgets due to ill-thought out borrowing decisions (e.g., imposing a high cost of debt servicing) will inhibit necessary (e.g., public goods), productive (e.g., capital formation), countercyclical (e.g., stimulus), and emergency (e.g., disaster relief) spending. Furthermore, taxes that are designed for revenue maximisation may derogate from their allocative, cost internalising, distributive, and emergency relief functions, which are critical for economic management.

Technical expertise and domain specialisation are ostensible safeguards against wrongful decisions on public money. These safeguards have been imbibed to a large extent in the context of central banks and their independence. However, due to the legal-institutional design of public finance decision-making in India, there is a high degree of political (executive) control over decisions on borrowings, spending, and taxation. Political short-termism (enabled by the short-sightedness of voters) makes it likely that decisions on public funds and their utilisation are based on the prospect of electoral gains. This may jeopardise economic outcomes (e.g., inflation, employment, income and growth) and leave public needs unfulfilled. It may also erode the institutional capacity which is needed for curbing unilateral executive power and undermine the constitutional-legal scheme of fiscal federalism and decentralisation.

Of late, there is growing recognition of the Union Executive’s control over the central bank, weak powers over the purse of the legislature and limited accountability to the judiciary and fourth branch institutions. The absence of robust ex ante and ex post safeguards to decision-making makes it necessary to explore the potential for imposing liability on the State for public finance decision-making.