Coronavirus – Economic Issues

Ease legal constraints on fiscal expenditure

Note4Students

From UPSC perspective, the following things are important :

Prelims level : FRBM Act provisions.

Mains level : Paper 3-Legal provisions for the fiscal consolidation that needs to be changed for the the stimulus package in the wake of corona pandemic.

The article discusses the two legal provisions that need to be changed in order to provide a fiscal stimulus of the size that could save the economy from collapse. Other major concern after the package would be the inflationary pressure resulting from government spending.

The urgency of the fiscal package by the Centre

  • The longer the Centre dithers over a big-bang fiscal package to counter the adverse economic fallout of covid-19, the closer it risks pushing India’s economy to the precipice of disaster.
  • The nationwide lockdown has more or less paralysed commercial activity, our exit path looks dreadfully long-winded, and the distress being seen right now could just be an early sign of what is to come.
  • The suffering of citizens will likely expand once the shutdown’s second-order effects, which operate with a lag, begin to kick in.
  • Estimates of ₹10 trillion needed by way of fiscal relief, once seen as too much by some, could yet turn out to be too little.
  • Either way, preparatory work in terms of legal enablers should be done alongside the arithmetic

Legal constraints in the way of the stimulus programme

  • There are two major constraints that we need to be relieved of—if only temporarily—for a stimulus programme to take shape.
  • The first is the Fiscal Responsibility and Budget Management (FRBM) Act of 2003.
  • And the second is the amendment done in 2016 of the Reserve Bank of India Act to give legislative cover to a flexible inflation-targeting framework that set our central bank the task of keeping India’s retail price index within a certain band.
  • Both of these were aimed at long-term economic stability but made no allowance for a robust fiscal response to the kind of crisis we now face.
  • It would be best if these were tweaked appropriately by a special session of Parliament.
  • If not, then ordinances should be issued to suspend specific restrictions for a while.

Projections of fiscal deficit

  • Under the budget presented in February, the Centre’s fiscal deficit for 2020-21 was projected at 3.5% of gross domestic product (GDP).
  • This included a half percentage point deviation from the FRBM glide path allowed by the law’s contingency clause.
  • Total expenditure was placed at a little over ₹30.4 trillion, and receipts at ₹22.4 trillion-plus.
  • With tax revenues and asset-sale realizations expected to fall short, the fiscal gap could widen to about ₹10 trillion even without any extra spending.
  • Drastic cuts in expenditure could save some money, but even if a heavy axe is wielded on expenses, the government’s deficit this year would have to exceed twice the legal limit for a stimulus that saves the economy from collapse.
  • If this turns out to be a year of negative growth, as some fear, effecting a revival will only get harder.
  • For pre-emptive action, the government should use its parliamentary clout to permit a limitless deficit for 2020-21.

A question based on the limits placed by the FRBM Act and the changes brought by the amendment to the RBI Act which mandated RBI with managing the inflation could be asked by the UPSC.

Prospects of inflationary pressure and RBI’s mandate

  • An effort to spend our way out of an economic morass could prove inflationary if too much cash ends up chasing too few goods and services.
  • As we have undergone both demand and supply shocks, opinion is divided on whether prices will go haywire.
  • This risk would depend on how much cash gets pumped around at what point in time and the pace at which supplies are restored.
  • In other words, the inflation outlook is highly uncertain.
  • But should prices threaten to rise, it would be counterproductive of the central bank to tamp them down by tightening credit.
  • As of now, RBI’s mandate is to keep inflation at 4%, with a tolerance band of 2% on either side.
  • This target is valid till March 2021, but needs to be reviewed right away to let the central bank focus on growth.
  • The acceptable range could be widened and the time limit to achieve the goal lengthened as a special reprieve.

Conclusion

A few tweaks of the law must go alongside calculations of a stimulus package designed to relieve economic distress. The government should act on these quickly to save the day.

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