Despite the strain on government finances due to the COVID-19 pandemic, there is no credible proposal to amend the legislation meant to control the fiscal deficit, Chairman of the 15th Finance Commission N.K. Singh said.
Speaking to presspersons after a two-day meeting of the Commission’s Economic Advisory Council, Mr. Singh said the government was currently looking to see how to ameliorate economic hardship while staying within the broad framework of the existing law.
While presenting the Union Budget in February, the Finance Minister had invoked the Fiscal Responsibility and Budget Management Act’s escape clause to relax the fiscal deficit target for 2020-21 by 0.5% percentage points to 3.5% of the GDP. If the government wishes to increase spending further in light of the current crisis, as many economists have recommended, it may need to amend the Act.
The State governments have been demanding that their own 3% fiscal deficit targets be relaxed to 4% or even 5%, to give them elbow room in dealing with the impact of the lockdown.
Need for new law
Dr. Singh said that change would not be possible without fresh legislation being enacted by the States. A more expeditious method would be for the States to first trigger their own escape clauses, he said. He also cautioned that the States need to weigh the cost of borrowing from the market, and whether there would be appetite for their bonds.
According to an official statement, Economic Advisory Council members felt that options need to be considered for financing the additional deficit. It is important to ensure that the State governments get access to adequate funds to undertake their fight against the pandemic, they said, adding that different States may come out of the pandemic’s impact in different stages.
Council members all felt that earlier projections of real GDP growth will need to be revised downwards considerably, though Dr. Singh declined to quantify the drop until fourth quarter macroeconomic data becomes available. Noting that the lockdown’s impact on public finances will be significant, with a large shortfall in tax and other revenues, the Council recommended a nuanced fiscal response, with a focus not just on the size but the design of any stimulus package.
A support mechanism for cash-starved small enterprises needs to be a top priority, along with partial loan guarantees and other measures to protect non-banking financial companies, the Council said.
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