Budget 2020 expectations: Modi government may use the escape clause to relax the fiscal deficit target

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Updated: January 06, 2020 4:24 PM

Budget 2020-21 India expectations: Prime Minister Narendra Modi's government is facing the tough challenge of reviving the economy since the start of its second term.

Union Budget, Budget 2020, Budget 2020-21,Budget 2020 expectations: It’s a double whammy for Prime Minister Narendra Modi and finance minister Nirmala Sitharaman as the government is facing a tough task of kick-starting the economy in its second term.

Budget 2020-21 India expectations: A slowing economy and dwindling revenue may force Prime Minister Narendra Modi’s government to use the escape clause to go beyond the budgeted figure of fiscal deficit for FY 2019-20. In her maiden budget presented in July last year, finance minister Nirmala Sitharaman estimated that fiscal deficit of the Union government will be 3.3% of the GDP. However, the Union government overshot its borrowing target by more than one lakh crore rupees in the first 8 months of this fiscal. The Union government borrowed Rs 8.07 lakh crore between April and November this year to meet its expenditure against the borrowing target of Rs 7.04 lakh crore for the entire fiscal through March 2020, raising concerns in the policy circles.

It’s a double whammy for Prime Minister Narendra Modi and finance minister Nirmala Sitharaman as the government is facing a tough task of kick-starting the economy in its second term. Its target of achieving a $5 trillion economy by 2024 has become even more daunting given the double whammy of a slowing economy coupled with dwindling revenue on account of the stimulus package announced by it that also entailed a sharp cut in corporate tax rate among other things.

It has forced the government to resort to expenditure cut in the last three months of this fiscal. According to reports, the government has asked the ministries and departments to restrict their spending in the fourth quarter to 25% of their annual budget instead of 35%. It also asked them to limit their expenditure to 10% of the annual budget in the last month of this fiscal as against the earlier practice of 15%.

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However, economists are not convinced. According to Sunil Sinha, Principal Economist of India Ratings, the government may overshoot the fiscal deficit target by 30 basis points, from 3.3% of the GDP to 3.6% of the GDP.

“It appears to me that given the situation, the government will use the escape clause recommended by the NK Singh Committee report,” said Sunil Sinha.

What is the escape clause suggested by NK Singh Committee

In its report submitted in January 2017, the FRBM review committee chaired by NK Singh has recommended an escape clause to provide elbow room to the government to deal with the situation beyond its control such as an external factor impacting the economic growth. The clause entailed relaxation of FRBM target by 50 basis points in the times of crisis and increased prudence during the good times.

The government can invoke it due to overriding considerations of national security, acts of war, national calamities, the collapse of agriculture that affects farm output and incomes. It can also invoke the clause if it has made far-reaching structural reforms with unintended fiscal implications.

This elbow room is also available if the GDP growth in any quarter declines by 3% below the average of the previous 4 quarters.

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The committee considered it necessary to put a cap on the government’s power to relax the FRBM target in view of the loose fiscal policy adopted during 2008 to 2013 to tide over the global economic crisis.

“The deviation from the stipulated fiscal deficit target shall not exceed 0.5% in a year provided it is accompanied by a clear commitment to return to the original fiscal target in the ensuing fiscal year,” said the NK Singh Committee.

If the government finds it difficult to stick to the fiscal deficit target of 3.3% for FY 2019-20 then it can relax it by up to 50 basis points by invoking the escape clause as recommended by NK Singh Committee.

Escape clause may not solve the problem

However, economists like Sunil Sinha are of the view that if the government invokes the ‘escape clause’ this year then it may have to invoke the escape clause next year as well.

“If they use the escape clause then they will not be able to manage the fiscal deficit. If they do that and if they are required to provide any further fiscal stimulus then they will have to use the escape clause next year as well,” Sunil Sinha told Financial Express Online.

However, if it happens then it will be contrary to the recommendations made by the NK Singh Committee which said that the government must make a clear commitment to come back to the original fiscal deficit target in the next financial year.

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