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No need to amend FRBM Act as it provides headroom for big fiscal slippage beyond 0.5% of GDP

No need to amend FRBM Act as it provides headroom for big fiscal slippage beyond 0.5% of GDP

No need to amend FRBM Act as it provides headroom for big fiscal slippage beyond 0.5% of GDP
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By Sapna Das  May 30, 2020 1:19:43 PM IST (Updated)

The government may not be required to change FRBM Act despite a significant breach of the FY20 revised fiscal deficit target and a much higher deficit this year due to the COVID-19 impact.

The Narendra Modi government may not be required to change Fiscal Responsibility and Budget Management (FRBM) Act despite a significant breach of the FY20 revised fiscal deficit target and a much higher deficit this year due to the COVID-19 impact, government officials privy to the developments told CNBC-TV18.

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The wriggle room provided by the FRBM Act goes much beyond the 0.5 percent escape clause, to accommodate big fiscal slippages. The original FRBM Act of 2003 states the union finance minister has to inform the Parliament on fiscal deviations caused by unforeseen circumstances and whether the deviations are substantial.
To quote from the act, "Where, owing to unforeseen circumstances, any deviation is made in meeting the obligations cast on the central government under this act, the minister-in-charge of the ministry of finance shall make a statement in both Houses of Parliament explaining the following: any deviation in meeting the obligations cast on the central government under this Act; whether such deviation is substantial and relates to the actual or the potential budgetary outcomes and the remedial measures the central government proposes to take."
Officials say the above provision has remained unchanged since the time of enactment of the law and can be put to use in difficult times, without changing the architecture of the act.
Economic disruption caused by the COVID-19 pandemic is likely to fit the "unforeseen circumstances" under the FRBM Act and can be used by the government to explain larger fiscal slippages.
The FY20 March end fiscal deficit now stands at 4.59 percent against the 3.8 percent revised target, a breach of 0.7 percent or a Rs 1.69 lakh crore gap, as per the Comptroller General of Accounts (CGA) data released on Friday.
Since last three consecutive years government has consistently missed its tax revenue targets. Financial year 2019-20 probably took the cake with a likely tax shortfall of over Rs 4 lakh crore - Rs 2.70 lakh crore projected in the February 1 budget and another Rs 1.49 lakh crore slippage by March end as per the CGA data, pushing the FY20 tax revenue gap to around 2 percent of the GDP.
However, unlike the previous years, there was no expenditure compression in March to meet the fiscal deficit target. 99.5 percent of the revised expenditure budget for FY20 was spent against 94.2 percent in FY19.
Anticipating a larger shortfall in revenues on poor economic growth and the revenue hit due to corporate tax rate cuts, the government lowered its expenditure by Rs 88,000 crore in the February 1 budget and shifted the food subsidy payment to off budget financing.
The government otherwise would have announced a fiscal deficit of over 4.2 percent on February 1 itself. India's FY20 growth is now at a 11-year-low of 4.2 percent, with the deficit number higher than the GDP growth.
April Government Finances: CGST Mop Up At Rs 5,934 crore
The impact of the COVID-19 led lockdown on government's finances for April is most evident in the negative growth in Central Goods and Service Tax (CGST), Income Tax and customs collections.
According to CGA, FY21 April CGST collections were a mere Rs 5,934 crore, against close to Rs 47,000 crore collected in April FY20. The GST compensation cess collection was Rs 990 crore against Rs 8,874 crore collected in April last year.
Income tax collection was lower by Rs 12,738 crore, while customs revenue was lower by Rs 9,171 crore YoY. However, April corporate tax collections were higher by 57 percent at Rs 19,514 crore.
Similarly, non-debt capital receipts in April were a mere Rs 365 crore, while the full fiscal target inclusive of divestment receipts is Rs 2.24 lakh crore. Also, while overall expenditure in April is higher this fiscal against FY20, capital expenditure has been lower.
For now, government officials indicate FY21 fiscal deficit in the 5.5 percent range with the announcement of additional borrowing of Rs 4.20 lakh crore on May 8.
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