The government of the National Democratic Alliance (NDA) may revise the Fiscal Responsibility and Budget Management Act (FRBM) in light of the economic crisis caused by the Covid-19 pandemic and adopt a flexible and limited-range fiscal deficit target instead of a fixed number. said two people familiar with the plan.
This matter is under active discussion in various official forums and some kind of flexibility is expected in the next Budget, which will be presented on February 1, 2021, the two people said, requesting anonymity. On October 16, the Union Ministry of Finance will initiate formal meetings on Revised Estimates (RE) for the 2020-21 budget and consultations on the 2021-22 budget estimates.
India’s gross domestic product contracted by a record 23.9% in the quarter ending in June, primarily as a result of the Covid-19 pandemic and the ensuing 68-day lockdown imposed on March 25.
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“Its adverse impact on the economy and society could linger for a long time. The government may require additional resources to counter its impact even next year. In such a situation, it is thought to have a flexible approach [towards borrowings]”Said one of the officials cited above.
The government has already raised its borrowing limit to provide an economic stimulus of Rs 20.97 lakh crore between March and May this year. On May 8, the government raised its gross market borrowing target for financial year 2020-21 to Rs 12 lakh crore from Rs 7.8 lakh crore budgeted in February. The limit was increased to combat the pandemic.
Economic Affairs Secretary Tarun Bajaj said on Wednesday that the government had already borrowed Rs 7.66 lakh crore in the first half of the current financial year at a cost of 5.82% and plans to borrow the remaining Rs 4, 34 lakh crore for January 2021. plan takes into account the possibility of a second stimulus, if necessary.
On the need to make the FRBM Law more flexible, he said: “The FRBM [Act] you already have a provision that allows us to make these deviations in the circumstances. We have to issue a statement in Parliament, which we will do ”.
The 2020-21 budget had already evoked the escape clause of the FRBM Law to relax the fiscal deficit targets to 3.8% of GDP in fiscal year 2020 and to 3.5% in fiscal year 2021. “The section 4 (2) of the FRBM Law establishes a trigger mechanism for a deviation of the estimated fiscal deficit due to structural reforms in the economy with unforeseen fiscal implications. Therefore, I have taken a deviation of 0.5%, consistent with Section 4 (3) of the FRBM Law, for both RE 2019-20 and BE 2020-21 ”, said the Minister of Finance, Nirmala Sitharaman, in her Budget speech on February 1.
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The improved borrowing cap is already around 5.8% of GDP after the Rs 20.97 lakh crore stimulus package was announced in May, the second official said.
Despite this, the economy has contracted dramatically by 23.9% in the first quarter of this financial year. Therefore, another stimulus will soon be needed to boost the sagging economy, which may force the government to borrow more, ”the official added.
The issue of fiscal deficit flexibility was also discussed at the Economic Advisory Council of the 15th Finance Commission (XVFC) on September 4, officials said. Briefing journalists about the meeting, XVFC chair NK Singh said the commission had discussed providing a range for the fiscal deficit target rather than a fixed number, which would be in line with the Reserve Bank’s monetary policy. of India (RBI), with an inflation of +/- 2%. objective.
According to the first official, some politicians also think that a fixed number compared to a range of fiscal deficit is more predictable, therefore, it instills confidence in investors, since in the case of a range, the government tends to move towards the top end.
DK Srivastava, Senior Policy Advisor at EY India, said the FRBM Act should be revised, particularly in such exceptional circumstances. However, he said the FRBM Act is also limited by range. “There is already a range. There is no obstacle to keeping the fiscal deficit below the limit ”, he said.
Divakar Vijayasarathy, founder and managing partner of the consulting firm DVS Advisors LLP, said: “The current situation is unexpected … In this context, expecting to stick to the FRBM target would be unfair and any attempt to stick to it would only be counterproductive” .
He added: “Also, instead of a target figure, the range would be practical considering the fact that the fiscal deficit is influenced by several factors and a range concept similar to the inflation target for the MPC. [monetary policy committee of RBI]It would be fair, ”he said.
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