Context: The nationwide lockdown has more or less paralysed commercial activity.
- Economy slowing down: Exit path looks dreadfully long-winded, and the distress being seen right now could just be an early sign of what is to come.
- The suffering of citizens will likely expand once the shutdown’s second-order effects, which operate with a lag, begin to kick in.
Need of the hour:
- Fiscal stimulus: The longer the Centre dithers over a big-bang fiscal package to counter the adverse economic fallout of covid-19, the closer it risks pushing India’s economy to the precipice of disaster.
- As per estimates, ₹10 trillion is needed by fiscal relief.However, the preparatory work in terms of legal enablers should be done alongside the arithmetic.
- The first is the Fiscal Responsibility and Budget Management (FRBM) Act of 2003.
- The second is the amendment done in 2016 of the Reserve Bank of India Act to give legislative cover to a flexible inflation-targeting framework that set our central bank the task of keeping India’s retail price index within a certain band.
- Both of these were aimed at long-term economic stability, but made no allowance for a robust fiscal response to the kind of crisis we now face.
- Under the budget presented in February, the Centre’s fiscal deficit for 2020-21 was projected at 3.5% of gross domestic product (GDP). This included a half percentage point deviation from the FRBM glide path allowed by the law’s contingency clause.
- Drastic cuts in expenditure could save some money, but even if a heavy axe is wielded on expenses, the government’s deficit this year would have to exceed twice the legal limit for a stimulus that saves the economy from a collapse.
- If negative growth: If this turns out to be a year of negative growth, as some fear, effecting a revival will only get harder. For pre-emptive action, the government should use its parliamentary clout to permit a limitless deficit for 2020-21.
- Fiscal stimulus could be inflationary: if too much cash ends up chasing too few goods and services. This risk would depend on how much cash gets pumped around at what point in time and the pace at which supplies are restored.
- Need review: As of now, RBI’s mandate is to keep inflation at 4%, with a tolerance band of 2% on either side. This target is valid till March 2021, but needs to be reviewed right away to let the central bank focus on growth.
- The acceptable range could be widened and the time limit to achieve the goal lengthened as a special reprieve.
The Fiscal Responsibility and Budget Management (FRBM) Act, 2003
To make the Central government responsible for ensuring “inter-generational equity in fiscal management and long-term macro-economic stability”.
- It is aimed at preventing profligate spending by a government, so that future generations would not be saddled with the payback burden, inflation could be kept in better control, and the stability assured could set conditions for the economy to expand faster.
The Act envisages the setting of limits on the Central government’s debt and deficits as well as mandating greater transparency in fiscal operations of the Central government and the conduct of fiscal policy in a medium-term framework.
The government is also required to provide the Parliament details of fiscal indicators such as
- Fiscal, revenue and primary deficit as a percentage of GDP,
- Tax and non-tax revenues as a percentage of GDP
- Central government debt as a percentage of GDP
In May 2016, the government had set up a committee under NK Singh to review the FRBM Act. as it believed that the targets under the act were too rigid.
The committee recommended that the government should target a fiscal deficit of 3 percent of the GDP in years up to March 31, 2020 cut it to 2.8 per cent in 2020-21 and to 2.5 percent by 2023.
But the targets were modified again in due course of time,Most recent target includes
- Fiscal deficit of 3.8% estimated in Revised Estimates (RE) 2019-20 and 3.5% for Budget Estimates (BE) 2020-21.
- Limiting Debt of the central government to 40% of the GDP by 2024-25.
- Revenue deficit to be brought down to 0%.
Linkages with the states
- To ensure that the States too are financially prudent, the 12th Finance Commission’s recommendations in 2004 linked debt relief to States with their enactment of similar laws.
- The States have since enacted their own respective Financial Responsibility Legislation, which sets the same 3% of Gross State Domestic Product (GSDP) cap on their annual budget deficits.
Escape clause:Section 4(2)
The Centre can exceed the annual fiscal deficit target citing the following grounds
- National security
- National calamity
- Collapse of agriculture
- Structural reforms and
- Decline in real output growth of a quarter by at least three percentage points below the average of the previous four quarters.
Image Source: Livemint