Government May Not Need To Invoke Fiscal Deficit ‘Escape Clause’ Due To GST: NK Singh

The implementation of the goods and services tax (GST) may not require the government to invoke a new ‘escape clause’ included in the recommendations of the Fiscal Responsibility and Budget Management (FRBM) Review Committee, said NK Singh, the chairman of the panel in an interview with BloombergQuint.

Finance Minister Arun Jaitley’s decision to peg the fiscal deficit for 2017-18 at 3.2 percent, higher than the suggested 3 percent, accounts for some possible shortfall in revenue due to the new indirect tax regime which will be implemented mid-way through the financial year, said Singh. That said, it is difficult to clearly assess the impact of GST at this stage, said Singh, while adding that certain important decisions are still to taken by the GST council. This includes determining which goods fall under which rate slabs.

Singh told BloombergQuint that the five-member panel headed by him has not recommended a range as the fiscal deficit target. Instead the new framework provides for an ‘escape clause’ with a ceiling of 0.5 percent of GDP in a year.

The escape clause can be triggered under three circumstances:

• Acts of aggression, security, war, floods, natural disaster, agricultural production leading to distress in rural areas.
• A sharp decline in real output growth of atleast 3 percentage points below the average of previous four quarters
• Structural reforms which would have unanticipated revenue implications

While the Finance Minister mentioned some of the committee’s recommendations in the budget speech, the government is yet to formally accept the panel’s suggestions. Other key suggestions made by the panel include a capping of the debt-to-GDP ratio at 60 percent by 2023, said NK Singh. The full report of the panel is yet to be released.

Here are edited excerpts from that conversation:

First and foremost, it (the budget) has given a very firm indication to the market of its commitment to stick to the path of fiscal consolidation. Whether it is 3 percent or 3.2 percent.

Three percent is what we had recommended, which the Finance Minister said in the Budget speech itself. We had not given any range but we have some escape clauses in the report. The escape clause ceiling is 0.5 percent of GDP in one annual year but with a firm commitment to return to path from where the deviation has taken place.

I think the Finance Minister has been very fair in not invoking the escape clause in the first year. Instead, FM has somewhat deviated from 3 percent target to 3.2 percent but with a firm commitment to return to 3 percent next year, and thereon. So, clearly there is a strong commitment to adhere to the path of fiscal consolidation. This provides the market very firm assurance on the government’s macro management policies. Markets reacted favorably to this part of the budget announcement.

The first is acts of aggression, security, war, floods, natural disaster or a sharp drop in agricultural production leading to distress in rural areas. Second. a sharp decline in real output growth of atleast 3 percentage points below the average of previous four quarters. Third, far reaching structural changes which would have revenue implications that are unanticipated.

FM mentioned in the budget speech that both GST and demonetization are structural reforms. Both these (GST and demonetisation) have unanticipated revenue outcomes. He said that he could have triggered this (the escape clause) off, but he didn’t. Instead he has just deviated by 0.2 percent.

This was a very positive thing for international investors. It shows commitment to macroeconomic stabilization policies and also has an impact on inflation and inflationary expectations. In the medium term, it provides room for future monetary policy accommodations as time goes on.

This path would be achieving 3 percent, 3 percent, 3 percent (fiscal deficit) and a path thereafter. Of course, this will have a consequence on the primary balance, if you do fiscal consolidation in this particular way.

We have given a path of fiscal consolidation in the report. That path, if the government accepts, will enable you to reach the 60 percent debt-to-GDP ratio by 2023.

States, in the initial period of the existing FRBM, by and large adhered to the states’ fiscal deficit target. But there has been some deterioration with respect to some states on account of the impact of UDAY bonds. UDAY bonds are contingent upon the fact that you improve the working of your electricity boards through appropriate tariff fixation, appropriate transmission and so on. It is not a permanent loss but has a transitional impact. Actually, it’s a shuffling of accounts because electricity boards are sovereign owned anyway. It will only make it more transparent.

So finances of some states are at stress more than the finances of others. But it was not the mandate of this committee to go into individual state finances. We have said in the report that when the 15th Finance Commission is constituted, in accordance with the provisions of the Constitution, one of the things that the Commission should look into is inter se balancing of state debt and which state needs to take more stringent measures for broad conformity to the prescribed debt target.