Little option for govt other than amending FRBM Act to widen fiscal deficit

It has already exhausted the escape clause, which allows for a maximum deviation of 0.5% from consolidation road map

The government may have to amend the Fiscal Responsibility and Budget Management (FRBM) Act once more to enable it widen fiscal deficit beyond the permissible limit under the present legislation.

The latest budget used the escape clause to the maximum to widen the Centre's fiscal deficit by 0.5 percentage points beyond the fiscal consolidation road map for 2019-20 and 2020-21.

The Budget Estimates had pegged the deficit at 3.3 per cent of the country's gross domestic product (GDP) for 2019-20, but the Revised Estimates (RE) projected it to be 3.8 per cent.

Similarly, the Budget Estimates put the deficit at 3.5 per cent of GDP for 2020-21 against the new provisions under the amended FRBM Act that pegged the deficit at three per cent of GDP.

The N K Singh Committee to review FRBM Act had recommended that escape clauses can trigger in following three situations:

i) There is overriding consideration of national security, acts of war, calamities of national proportion and collapse of agriculture severely affecting farm output and income.

ii) There are far-reaching structural reforms in the economy with unanticipated fiscal implications.

iii) There is sharp decline in real output growth of at least three percentage points below the average for the previous four quarters.

The deviation from the road map can be no more than 0.5 percentage points.

These recommendations were introduced in the amended FRBM Act through the Finance Act, 2018.

The deviation happened before Covid-19 emerged in even Wuhan in China and there was no significant threat to the national security. So, reason No.1 could not be used to trigger the escape clause.

There was decline in real output growth, but not to the extent of three percentage points. At the time of Budget presentation, the growth rate for FY20 was pegged at seven per cent by the Economic Survey, against 6.8 per cent a year ago. It is another matter that as the year progressed, the reality dawned and both the first and the second advance estimates pegged the growth at five per cent for FY20. So reason No.3 could also not trigger the clause.

This left the government with reason No. 2. Finance minister Nirmala Sitharaman did say in her Budget speech, "Section 4(2) of the FRBM Act provides for a trigger mechanism for a deviation from the estimated fiscal deficit on account of structural reforms in the economy with unanticipated fiscal implications. Therefore, I have taken a deviation of 0.5 per cent, consistent with Section 4(3) of FRBM Act, both for RE 2019-20 and BE 2020-21."

She said the government has recently undertaken very significant tax reforms for boosting investments. However, expected tax buoyancy will take time.

The government had announced corporate tax cuts that were expected to hit the exchequer by Rs 1.45 trillion in 2019-20.

In fact, the government had deferred the target of containing fiscal deficit to three per cent through amendments in the FRBM Act compared to what was recommended by the N K Singh panel. The panel wanted the target to be achieved by 2017-18 and keep it at that level for the next two years, that is, till 2019-20. It should then gradually come down to 2.8 per cent in 2020-21, and 2.6 per cent in 2021-22. In 2022-23, it should be 2.5 per cent.

However, the government shifted the goal of three per cent to 2020-21. And later, this was also pegged at 3.5 per cent after the government used the escape clause.

In fact, the revised targets for 2019-20 and 2020-21 are in all likelihood to be missed with the deadly corona virus emerging on the scene. This is certain for 2019-20, because the target has already been surpassed by 35 per cent in absolute terms till February.

For 2020-21, the government has already announced a Rs 1.70 trillion package for the vulnerable sections of the society to help them survive Covid-19. Though many say the additional expenditure would not be more than Rs trillion, given the fact that most industries aren't producing anything, the government's revenues would also be impacted. As such, even the revised target would not be achieved in the current financial year. Also, at least one more package is likely to be announced shortly.

This would leave the government with little option but to make another amendment to the FRBM Act. 

A member of the FRBM panel said the government will have to do so, which is not an issue.

CARE Ratings chief economist Madan Sabnavis said fiscal deficit targets for the Centre are not cast in stone, unlike state governments which have to follow these targets. States have to keep their fiscal deficit at three per cent of their respective state GDPs, unless the Centre allows them more flexibility in difficult situations.

The government will have to change it though, but this amendment does not require two-third or three-fourth majority, he said.

However, some experts say that the government can widen the deficit beyond 0.5 percentage points in these times even without amending the Act.

Supreme Court advocate Kunal Tandon said according to the proviso 4(2) of the Finance Act, 2018, decline in real output due to unanticipated fiscal situations including a national calamity in a quarter allows the government to exceed the annual fiscal deficit by at least three percentage points over the average of the previous four quarters.

"This proviso can help the government, subject to compliance of the three per cent limit," he said.