Taking a cue from the Centre which invoked an exigency clause under the FRBM law to enable a deviation of 0.5 per cent of GDP each from the fiscal deficit road map for both FY20 and FY21, state governments could also amend their respective laws to use the clause and create extra headroom for spending, 15th Finance Commission Chairman NK Singh said on Thursday.
“It’s their (states) option, but if they exercise it, there comes the obligation of having a credible debt (reduction) trajectory. They don’t have to ask the Finance Commission for this exemption clause,” Singh said. The state governments could include this provision in their respective FRBM Acts, he added.
State governments have been on the path of fiscal consolidation and their combined fiscal deficit remained below the targets in FY19. For FY20, the states have budgeted for gross fiscal deficit of 2.6 per cent as against 2.4 per cent in FY19. However, the lower transfer of resources from the Centre from the divisible pool and weak performance of their own tax revenues could hamper their ability to stick to the fiscal deficit target this fiscal.
Given the sharp economic slowdown, the demand for counter-cyclical fiscal measures was gaining traction, at least two state finance ministers had told the Union Finance Minister in December to let the fisc to expand to counter the economic slowdown. “The biggest take home from pre-Budget discussion of FMs is suggestion by Bihar and Kerala to raise the fiscal deficit limit to 4 per cent. It was agreed to (by) a large number of states,” Kerala Finance Minister Thomas Isaac had tweeted on December 18, 2019.
States have continued on the fiscal consolidation path and contained the fiscal deficit within the targets set out by the Fiscal Responsibility and Budget Management (FRBM) Act in recent years, except in FY17 owing to the UDAY obligations. As per state budgets, their combined fiscal deficit stood at 2.4 per cent of GDP in FY19 and the target (Budget Estimate) for FY20 is 2.6 per cent. However, a steep cut in transfer of tax revenue from the central government and low growth in the states’ tax revenue could hamper their ability to stick to the fiscal deficit target for the current fiscal.
In fact, the rules allow the escape clause to be invoked after the 3 per cent target for fiscal deficit is achieved. The Centre’s fiscal deficit for FY20 was originally budgeted at 3.3 per cent and 0.5 per cent deviation increased it to 3.8 per cent (Revised Estimate).
The circumstances cited by the NK Singh panel for use of the escape clause inter alia include over-riding consideration of national security, acts of war, collapse of agriculture severely affecting farm output and incomes, structural reforms in the economy with unanticipated fiscal implications and decline in real output growth of a quarter by at least 3 pps below its average of the previous four quarters. —FE
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