Budget 2020: Government Pegs FY21 Fiscal Deficit At 3.5%; Invokes Escape Clause In FY20
A soldier stands guard in the corridors of the Secretariat Building at South Block in New Delhi, India, on Thursday, July 4, 2019. Photographer: T. Narayan/Bloomberg

Budget 2020: Government Pegs FY21 Fiscal Deficit At 3.5%; Invokes Escape Clause In FY20

India’s fiscal deficit settled at 3.8 percent in 2019-20 and will be targeted at 3.5 percent in 2020-21, Finance Minister Nirmala Sitharaman said in her Union Budget speech.

For 2019-20, the fiscal deficit was estimated at 3.3 percent at the time of the budget presentation in July. A fall in nominal growth for FY20 to 7.5 percent from an estimated 11 percent, however, led to a widening of the budget gap.

For the coming year, too, the government will deviate from an earlier set fiscal path and target a fiscal deficit of 3.5 percent.

Importantly, the government has decided to invoke the ‘escape clause’ provided for in 2018 amendments to the Fiscal Responsibility and Budget Management Act.

The revised Fiscal Responsibility and Budget Management Act allows the government an ‘escape clause’ of 0.5 percentage points. This clause can be invoked at a time of structural changes in the economy or a steep fall in growth. Invocation of this clause will open the door to the Reserve Bank of India buying government bonds directly via primary auctions, according to the FRBM (Amendment) Act 2018.

The widening of the fiscal deficit both for this year and the next is along expected lines, said Ananth Narayan, associate professor at SP Jain Institute of Management and Research. The actual budget numbers may suggest a bigger fiscal hole, Narayan said.

Addressing the concerns over the “real” fiscal deficit, Sitharaman said the central government debt that was not a part of market borrowings and was used to fund expenditure, was enumerated in the annex. The servicing of interest and repayment of these debts as hitherto done, will be out of the Consolidated Fund of India, she said.

3% Fiscal Deficit Goal Pushed Back

With the decision to keep the fiscal deficit at 3.8 percent for this year, the goal to bring down India’s fiscal deficit to 3 percent have been pushed back once again.

As per the government’s medium-term fiscal policy statement last year, the long-delayed goal was to be achieved by 2020-21. However, that goal has been deferred to at least 2023-24. The medium-term fiscal policy statement projects fiscal deficit at 3.3 percent of the GDP in 2021-22 and at 3.1 percent for 2022-23.

The fifteenth finance commission, in it’s recommendations on the fiscal consolidation path, said the government should ensure that there is a clear commitment to return to the original fiscal target in the ensuing year.

Also read: Budget 2020: Fifteenth Finance Commission Retains Devolution Formula With Some Adjustments

Gross Borrowings

Gross borrowings stood at Rs 7.1 lakh crore for 2019-20, and budgeted at Rs 7.8 lakh crore for 2020-21.

The central government’s debt is revised to 50.3 percent of the GDP from the budget estimate of 48 percent for 2019-20. For 2020-21, its debt is estimated at 50.1 percent of the GDP.

Watch | Fiscal deficit for FY20 revised to 3.8%

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