Fiscal Deficit at 3.8%: Nirmala Sitharaman makes full use of escape clause to tide over the difficult time

It was widely anticipated that the government will not stick to the path of fiscal consolidation but the budget revealed the true extent of the weakness of the Union government’s finances. It forced Nirmala Sitharaman to utilise the deviation in fiscal deficit target permitted by the escape clause to the maximum possible limit of 50 basis points.

Hyderabad: As widely expected, finance minister Nirmala Sitharaman decided to relax the fiscal deficit target by 50 basis points, from 3.3% of the GDP to 3.8% for the current financial year. In her maiden budget presented in July last year, she estimated that the Union government would need to borrow Rs 7.03 lakh crore, which was an all-time high. However, as per the revised estimates, the Union government borrowed Rs 63,000 crore more this year than its budget estimate.

“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,” Nirmala Sitharaman said in her budget speech, underlining the appropriate legal provision that permits her to use the escape clause as recommended by NK Singh Committee report in 2017.

It was widely anticipated that the government will not stick to the path of fiscal consolidation but the budget revealed the true extent of the weakness of the Union government’s finances. Union government’s net tax collection was Rs 1.46 lakh crore less than its budget estimates given just seven months ago.

It forced Nirmala Sitharaman to utilise the deviation in fiscal deficit target permitted by the escape clause to the maximum possible limit of 50 basis points. Moreover, the economy is so fragile that she decided to use the deviation for two years in a row, in FY 2019-20 and 2020-21.

“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,” said the finance minister who has been grappling with the twin challenges of dwindling revenue collection and economic slowdown that makes her task of turning around the economy even more daunting.

What is the fiscal deficit?

The fiscal deficit is one of the most keenly watched numbers in the Union budget as it reflects the overall borrowing requirement of the Union government in a financial year. In 2019-20, the government will borrow Rs 7.67 lakh crore which is more than 28% of the total budgeted expenditure of the government, which has been pegged at Rs 26.99 lakh crore as per the revised estimates.

A high fiscal deficit means that the government is spending considerably more money than its tax and non-tax revenue receipts that will increase its debt burden and affect its sovereign rating.

What is the fiscal deficit deviation permitted under the FRBM Act?

The NK Singh Committee, which was constituted to review the working of the FRBM Act of 2004, suggested deviation of up to 50 basis points in a fiscal year to allow the government to tide over the difficult situation caused by structural changes in the economy or cause due to unforeseen circumstances.

Though the NK Singh panel was mindful of the need to relax the fiscal deficit target under exceptional circumstances it also felt it necessary to cap the government’s power to dilute the target.

It also made it mandatory for the government to outline its roadmap for returning to the path of fiscal consolidation in subsequent years.

“Accordingly, the return path is being laid before the parliament as a part of Medium Term Fiscal Policy-cum-Strategy Statement,” said the finance minister while asserting the government’s intent to return to the path of fiscal prudence.

“This fiscal path commits us to the path of fiscal consolidation without compromising the needs of investment out of public funds,” she said.

( Article by Senior Journalist Krishnanand Tripathi. )