Government considers fiscal deficit range instead of a fixed number from next fiscal year

This matter is under active discussion at various official forums and some kind of flexibility is expected in the next Budget, which is expected to be presented on February 1, 2021

The National Democratic Alliance (NDA) government may review the Fiscal Responsibility and Budget Management (FRBM) Act in the light of the economic crisis caused by the Covid-19 pandemic and adopt a flexible, range-bound fiscal deficit target instead of a fixed number, two persons aware of the plan said.

India’s gross domestic product shrank by a record 23.9% in the quarter ended June mainly as a result of the Covid-19 pandemic and ensuing 68-day hard lockdown imposed on March 25. (Representational Photo)

This matter is under active discussion at various official forums and some kind of flexibility is expected in the next Budget, which is expected to be presented on February 1, 2021, the two persons said, requesting anonymity. On October 16, the Union finance ministry will start formal meetings on revised estimates (RE) for the budget of 2020-21 and consultations on the 2021-22 budget estimates.

India’s gross domestic product shrank by a record 23.9% in the quarter ended June mainly as a result of the Covid-19 pandemic and ensuing 68-day hard lockdown imposed on March 25.

“Its adverse impact on the economy and society could stretch for long. Government may require additional resources to counter its impact even next year. In such a situation, there is a thinking to have a flexible approach [towards borrowings],” one of the officials cited above said.

The government has already raised its borrowing limit to provide a ₹20.97 lakh crore economic stimulus between March and May this year. On May 8, the government raised its gross market borrowing target for the 2020-21 financial year to ₹12 lakh crore from ₹7.8 lakh crore budgeted in February. The limit was increased to combat the pandemic.

Economic affairs secretary Tarun Bajaj on Wednesday said the government had already borrowed ₹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 ₹4.34 lakh crore by January 2021. He saidt the borrowing plan factored in the possibility of a second stimulus, if it is required.

On the need for making FRBM Act flexible, he said, “The FRBM [Act] already has a provision which allows us to do these deviations in circumstances. We have to lay down a statement in Parliament, which we will do.”

Budget 2020-21 had already evoked the escape clause of the FRBM Act to relax fiscal deficit targets to 3.8% of GDP in FY 2020 and 3.5% in FY 2021. “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%, consistent with Section 4(3) of FRBM Act, both for RE 2019-20 and BE 2020-21,” finance minister Nirmala Sitharaman said in her Budget speech on February 1.

The enhanced borrowing limit is already about 5.8% of GDP after the ₹20.97 lakh crore stimulus package was announced in May, the second official said.

“Despite this the economy has contracted sharply by 23.9% in the first quarter of current financial year. Hence, another stimulus may be needed soon to boost the sagging economy, which may compel 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, the officials said. Briefing journalists on the meeting XVFC chairman NK Singh said commission had discussed providing a range for the fiscal deficit target than a fixed number, which would be in congruity with the Reserve Bank of India’s (RBI) monetary policy, with +/- 2% inflation target.

According to the first official, some policymakers are also of opinion that a fixed number compared to a fiscal deficit range is more predictable, hence instil investors’ confidence as in case of a range, the government tends to move towards the upper end.

DK Srivastava, chief policy advisor at EY India, said the FRBM Act should to be reviewed, particularly in such exceptional circumstances. He, however, said the FRBM Act is also range-bound. “There is already a range. There is no bar in keeping the fiscal deficit lower than the limit,” he said.

Divakar Vijayasarathy, founder and managing partner at consulting firm DVS Advisors LLP,said: “The current situation is an unanticipated one... In this back drop, expecting to stick to the FRBM target would be unfair and any attempts to stick to it would only backfire.”

He added: “Further, instead of a target figure, range would be practical considering the fact that fiscal deficit is influenced by various factors and range concept similar to the inflation target for the MPC [monetary policy committee of RBI], would be fair,” he said.