The government of Kerala has recently appealed for flexibility under the Fiscal Responsibility and Budget Management (FRBM) Act. This plea is mainly to guarantee that the fiscal stimulus, in response to the COVID-19 crisis, does not get hampered by FRBM regulations.
Kerala’s Economic Position and Need for Flexibility
In the current fiscal scenario, Kerala has the capability to borrow approximately ₹25,000 crore throughout the financial year 2020-21. The State, taking cognizance of the severe effects on livelihoods and economic activities due to the stringent actions to combat COVID-19, announced an emergency aid package of Rs. 20,000 crore. This includes the recent 21-day nationwide lockdown.
At the inauguration of the financial year, it proposed to procure as much as ₹12,500 crore from the market. However, the government is apprehensive that existing borrowing limits under fiscal responsibility laws might limit its borrowing and spending potential for the remaining 11 months of the fiscal year.
During these remaining months, the government must not only undertake COVID-19 mitigation steps but also address routine expenditure related to the operation of State’s socio-economic initiatives and post-pandemic recovery.
The FRBM Act Explained
Implemented in August 2003, the Act is aimed at making the Central government responsible for ensuring inter-generational equality in fiscal management and long-term macro-economic stability. It sets limits on the debt and deficits of the Central government, by confining the fiscal deficit to 3% of GDP.
The 12th Finance Commission, in 2004, connected debt relief to States with their enactment of similar legislation, to ensure financial prudence. Consequently, States launched Financial Responsibility Legislation, capping their annual budget deficits at the same 3% of Gross State Domestic Product (GSDP). The Act also requires enhanced transparency in fiscal operations of the Central government and the management of fiscal policy within a medium-term framework.
The FRBM Act’s Escape Clause
Under Section 4(2) of the Act, the Centre has the ability to surpass the annual fiscal deficit target, citing specific reasons such as national security, war, national calamity, collapse in agriculture, structural reforms, or a decline in real output growth of a quarter by at least three percentage points below the average of the previous four quarters.
Previous Instances of FRBM Relaxation
The escape clause was invoked during the Budget presentation for 2020-21. The reduction in corporate taxes were identified as structural reforms that initiated the clause. This facilitated an adjustment in the fiscal deficit target for 2019-20 to 3.8% from the budgeted 3.3%.
During the global financial crisis in 2008-09, the Centre relied on a concentrated fiscal stimulus, including tax relief to augment demand and escalated expenditure on public projects to generate employment and public assets. This resulted in a hike in the fiscal deficit to 6.2% from a budget goal of 2.7%. At the same time, the deficit goals for States were relaxed to 3.5% and 4% of GSDP for 2008-09 and 2009-10 respectively.
