24/03/2020 - Indian Economy

KEY POINTS

·         The government has already utilised the elbow room offered by the FRBM Act under exceptional circumstances in the FY20 and FY21 budgets, with the targeted budget deficits being 0.5% of GDP higher than the FRBM mandated ones.

·         In fact, given the recent trends, the FRBM Act-mandated maximum target of a fiscal deficit of 3.8% of GDP might have already been breached for FY20.

·         Earmarking an enhanced budget for healthcare would definitely be the top priority.
Income support to people whose livelihood has been impacted (these will primarily include daily wage earners in different industries, and services like construction, travel, etc). Direct cash transfer to this group is ideal, but might suffer from proper identification challenges.
Packages for deeply affected sectors like travel and tourism (9.2% of India’s GDP) and MSMES could have three components—temporary postponement of taxes, cheaper loans, and explicit financial grants.
the government could consider issuing a tax-free health emergency bond to tap more resources. In a volatile equity market environment, these bonds could receive good response.

·         Direct RBI monetisation of deficit, which is allowed by the FRBM Act under special circumstances, including “national calamity”.

·         Central bankers are trying to counter the two channels of transmission of the virus shock—financial stability risk arising out of large market dislocations, and growth risk from estimated disruption in economic activity.

·         It is important to create adequate buffers, so that the turmoil in equity market/macro economy does not spread to credit markets and cause any credit events.

·         RBI has been infusing both dollar, and rupee liquidity to ensure that the financial systems do not freeze up. This will prevent the spread of the shock due to overburdening of the financial system, which is already facing its own challenges.

Fiscal Responsibility and Budgetary Management Act(2003)  limits the government borrowings for maintaining Macro economic stability.

Necessity for the relaxation of provisions of FRBM ACT :

Due to Covid-19 pandemic the supply chain is largely effected which may lead to job cut of many employees,results in Vicious Cycle of Poverty.As per the IMF reports,Recession trends are prevalent in the present scenario.

In order to overcome/reduce the impact of the Recessionary trends,there is a need for easing the FRBM act provisions by the Government of India which can generate fiscal stimulus.

Fiscal Stimulus can be achieved by designing a proper fiscal package which is a great challenge because it has to look over the needs of the poor and also has to give a boost to the supply chain.

Points to be considered for designing for a fiscal package :

1.Funding health sector for building proper infrastructure and skill training of the paramedics.

2.Providing essential commodities for free of cost to the needy.

3.Packages for deeply effected sectors like Tourism,Micro Small Medium Enterprises etc.

Implications of easing FRBM act provisions :

1.The idea of 5 trillion dollar economy may not be achieved within the specified time limit.

2.Fiscal Burden on the Government which can impact policies/schemes meant for social welfare.

Irrespective of implications ,saving the people is the need of the hour  and Government need to step in to tackle the crisis and Fiscal stimulus is the best way as it was already proved during the Global Economic Crisis,2008.