No plan to ease fiscal deficit targets
States should trigger their own escape clauses, says Chairman of 15th Finance Commission N.K. Singh
- 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.
- 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.
- 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
- A more expeditious method would be for the States to first trigger their own escape clauses. The States need to weigh the cost of borrowing from the market, and whether there would be appetite for their bonds.
- It is important to ensure that the State governments get access to adequate funds to undertake their fight against the pandemic, different States may come out of the pandemic’s impact in different stages.
- The earlier projections of real GDP growth will need to be revised downwards considerably. 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.