Covid-19: Finance Commissions advisory panel suggests support to small businesses, NBFCs

Ghughuti Bulletin

https://www.livemint.com/news/india/covid-19-finance-commission-s-advisory-panel-suggests-support-to-small-businesses-nbfcs-11587741044482.html

New Delhi: The advisory council of the 15th Finance Commission on Friday observed that the government needs to follow a nuanced approach in its fiscal response to fight the economic slowdown induced by the Covid-19 pandemic and focus on designing the package as much as on the size of it.

In its two-day virtual meeting, which began on Thursday, the Advisory Council felt that the magnitude of the impact of the ongoing lockdown on public finances is uncertain, but will certainly be significant. “Governments will have substantial expenditure burden on account of health, support to poor and other economic agents. The Council Members felt that the shortfall in tax and other revenues will be large due to subdued economic activity. Hence, fiscal response to the crisis should be much more nuanced. It is important not just to look at the size of fiscal response but also carefully at its design,” the Commission said in a statement.

The finance ministry is conducting frequent meetings with the prime minister’s office to finalise the broad contours of the stimulus package. Prime Minister Narendra Modi is set to speak to chief ministers of states on Monday to further discuss the fallout of Covid-19 pandemic.

India’s ongoing 40-day lockdown brought economic activities into a standstill. Industry lobby, Confederation of Indian Industry, in a note on Thursday suggested urgent fiscal interventions including cash transfers amounting to 2 trillion to JAM account holders, additional working capital limits for MSMEs from banks, equivalent to April-June wage bill of the borrowers, backed by a government guarantee, at 4-5% interest.

The Commission also observed that since small scale enterprises were cash-starved even prior to the onset of Covid-19 outbreak, it is important that a support mechanism is devised to help them as their activity levels and cash flows have been affected. “Non-banking financial companies are also affected by the slowdown. In order to avoid bankruptcies and deepening of NPAs in the financial sector, measures should be appropriately designed. Measures like partial loan guarantee may help. The Reserve Bank of India will have a key role in ensuring that financial institutions are well-capitalized,” the Commission observed.

Two presentations were made during the meeting, one by the chief economic adviser in the finance ministry K. Subramanian on key macro-economic variables and another by Niti Aayog member Ramesh Chand on initiatives on agriculture sector. Briefing reporters after the meeting, FFC chairman N.K. Singh said the CEA Indicated that June quarter GDP print will fully encapsulate the impact of covid-19 pandemic and that he expects a V-shaped recovery rather than a muted one.

Singh said the Commission will wait till the March quarter GDP print, which will be available by May-end to make its estimates for FY22.

Singh said the coronavirus pandemic has fundamentally altered the health requirements of the country and the Commission will make special recommendations on building health infrastructure in its upcoming report to be submitted by October.

The Commission said the finances of both the central and state governments need to be watched carefully. “As of now, adequate provision for ways and means advances can largely help governments to manage cash-flow mismatches. As we move ahead, we need to think of options for financing the additional deficit. It is important to ensure that the state governments get access to adequate funds to undertake their fight against the pandemic,” it added.

On demand by states to substantially increase their fiscal legroom to finance Covid-19 related challenges, Singh said he does not dispute that state finances are under stress as their own revenue have shrunk and devolution from the centre in absolute term will be lower than the commission’s recommendations if divisible pool shrinks. “ Borrowing facility from National Small Savings Fund (NSSF) is always available to states and the cost may not be higher when compared to the cost of their market borrowing. States can use the 50 bps escape clause available in their FRBM acts. However, to breach the fiscal deficit limit of 3% of GDP, they may need centre’s permission,” he added.

However, Singh said he is not particularly in favour of RBI lending to the centre directly as part of deficit financing mechanism even though the option is available to the centre in the existing FRBM act.

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