Fiscal Consolidation Ex Post the ‘Escape Clause’

Launching an “excessive deficit procedure” in India is inevitable for growth revival. This is crucial, especially when there is considerable ambiguity about why the “escape clause” was invoked in the Union Budget 2020: whether to meet the shortfall in tax revenue emanating from the unanticipated fiscal outcomes of structural reforms, or to boost the capital formation in the economy.

The author sincerely acknowledges the diligent technical assistance from Divy Rangan.

The World Economic Outlook (WEO) 2020 released by the International Monetary Fund (IMF) has reduced India’s growth forecast to 4.8%, a reduction of 1.3% within three months. The WEO also indicated that the growth slowdown in an emerging economy like India has pushed down the global growth forecast by “0.1%” (IMF 2020). However, the Union Budget 2020 has done little to stimulate the economic growth, and the Ministry of Finance is in constant denial to accept that the economic slowdown in India is a “drag” on the world economy. Beyond the point of the “synchronised slowdown” argument—that the global growth downturn is also affecting India’s growth rate—the Union Budget 2020 has failed to use the “budget” as a potential fiscal tool to trigger the economy.

The only move by Finance Minister Nirmala Sitharaman, with regard to fiscal consolidation, was to invoke the “escape clause” of the new Fiscal Responsibility and Budget Management (FRBM) Act, 2018. However, there remains a genuine confusion as to whether invoking the “escape clause” to deviate from the fiscal consolidation path is in response to the shortage in tax revenue, emanating from the unanticipated outcome of structural fiscal policies undertaken, or whether it is for increasing capital (infrastructure) expenditure.