In the 2020 budget, the government crossed the fiscal deficit target of 3.5% set for the year as per the FRBM rule. The fiscal deficit target for the year 2019-20 (Revised Estimate) was 3.5% of GDP, but the actual deficit was 3.8%. Fiscal deficit in the current context is borrowing of the government in the budget.
What is escape clause?
While crossing the prescribed target, the government has resorted to the concession allowed for it under the FRBM. This concessional provision to go above the allowed fiscal deficit target is popularly known as the escape clause.
So, the escape clause of the FRBM allows the government to borrow more than the statutorily allowed limit during extraordinary circumstances. We can interpret the FRBM as the statute binding for the government to limit its borrowing or fiscal deficit.
Escape clause provision under FRBM
The Fiscal Responsibility and Budget Management (FRBM) Act was passed in 2003 and it sets the fiscal rules to be followed by the government to ensure fiscal consolidation.
In 2018, the Act was amended after a review of the Act made by a committee under Dr NK Singh. The committee suggested several measures; but decisively the committee observed that adhering to fiscal discipline based on target reduction of the fiscal deficit will be good for the government and the economy in general. Overspending causes economic disturbances.
After the recommendations of the committee, the FRBM Act was amended by the government in 2018. The amendment added a new road map and timeline to reduce the fiscal deficit to 3% of GDP by 31st March 2021. It also inserted the escape clause that allows the government to go above the fiscal deficit target set for the year during some extraordinary circumstances.
Grounds for the use of the escape clause
The subsection 4 (2) of the Act says about various grounds on which the FRBM’s fiscal deficit target may be exempted during a year.
Exceeding annual fiscal deficit target due to the following ground or grounds may be permitted:
(i) national security, act of war,
(ii) national calamity,
(iii) collapse of agriculture severely affecting farm output and incomes,
(iv) structural reforms in the economy with unanticipated fiscal implications,
(v) decline in real output growth of a quarter by at least three per cent points below its average of the previous four quarters,
The provision that describes about the procedures to be followed in such situations is inserted under Section 4 (5) of the FRBM Act.
|“Where the fiscal deficit is allowed to vary from the target prescribed under the provisoion to sub-section (2) or deviation is initiated under sub-section (4), a statement explaining the reasons thereof and the path of return to annual prescribed targets under this section shall be laid, as soon as may be, before both the Houses of Parliament.”|
Escape clause used in budget 2020
In the budget 2020, the revised statement for 2019-20 gives a higher fiscal deficit than the target allowed under the FRBM. Here, for the year, the fiscal deficit target was 3.5% of GDP. The revised estimate shows fiscal deficit of 3.8%. Hence, the escape clause has been used understandably and the government made an explanation about that in the Medium-Term Fiscal Policy Statement.
The government’s statement for the deviation and thus the use of the escape clause is as follows:
“The fiscal deficit target for 2019-20 has been recalibrated to 3.8 per cent of GDP compared to the Budgeted target of 3.3 per cent of GDP. The deviation has been necessitated on account of the structural reforms such as reductions in corporation tax taken by the Government. The fiscal expansion is within the provisions of Section 4(2) of the FRBM Act, 2003. A similar variation from the 2020-21 target of 3 per cent of GDP is anticipated on account of the spill over impact of the reforms.”
Hence, it is implied that for 2019-20, the fiscal deficit target is exempted because of the structural reforms undertaken in the form corporation tax reduction. The budget also hints that the same escape clause may be used for 2020-21 as well.