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Fiscal slippage likely to be managed by issuance of bonds to fund infrastructure expenditure

NEW DELHI: The Central government is expected to relax fiscal norms using a legal loophole to fund an expenditure push in infrastructure and rural spending in the upcoming budget; it may do so through bond issuances.

According to top officials, the government could use escape clauses in the Fiscal Responsibility and Budget Management (FRBM) Act to relax its preordained fiscal deficit target of 3 per cent to a higher spending.

“The FRBM allows for this in order to bring in structural reforms and the government may use that clause to stretch the deficit to 3.2 to 3.4 per cent of the GDP. Several structural reforms have been undertaken and a number of new reforms will be part of the budget … So, if we decide to relax deficit targets, we have a right to do so,” an official pointed out.

However, to fund any increase in fiscal deficit, the government has to increase borrowing. Commercial banks are usually happy to lap up any paper floated by the government, but the problem is that this could crowd out private sector borrowers.

As it is, the credit growth has been slowing. Credit growth for 2019 was at 7.1 per cent, the second slowest in this decade, and the government does not want it to slow down further.

One way out is to get the RBI to subscribe to the government’s borrowing programme. Though the Central government is not allowed to borrow from the RBI by law, it has the right to float bonds, which could be subscribed directly by the RBI.

Officials point out that relaxing the fiscal deficit would be also all right as the deficit for the current year would overshoot the target of 3.3 per cent and may go up to 3.5-3.6 per cent. “We will end the year with both lower GST collections because of the economic slowdown and lower corporate tax collections because of a tax cut,” said a top official of the revenue department.

Tax collections are expected to be better in 2020-21, but officials point out that with the huge cut in corporate tax rates and the slowdown persisting in the economy, the chances for double-digit increase in tax collections over the 2019-2020 budget estimates were not very bright.

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