A key economic advisory council of the Union government will meet this week to brainstorm the public spending needed to revive the economy amid mounting demands for a fiscal stimulus. The council, led by Fifteenth Finance Commission chairman NK Singh, will over two days, starting Thursday, deliberate on the impact of the Covid-19 pandemic on economic growth in this fiscal year and the next, and possible assumptions for tax buoyancy and revenue during the period.
On the public expenditure front, the council will discuss ways to shore up the economy, with state governments pitching for a host of measures, including greater flexibility to borrow and spend, to help tide over the crisis. Corporates have been asking for a ₹9-10 lakh crore stimulus package, which they believe would ensure greater liquidity for small businesses, cash in the hands of the poor that will drive demand for goods and services, and tax concessions. They have also sought policy measures that may include longer loan repayment moratorium for small businesses and suspension of the IBC for companies for six months.
The finance ministry has indicated that it is working on a support package for the worst-hit segments of the economy, such as micro, small and medium enterprises (MSMEs), which may include liquidity support as well as quick processing of tax refunds and dues from the government, while a larger stimulus package may be looked at in due course.
Given the uncertainty around how the pandemic may play out in the coming days, it may not be feasible to precisely quantify how much fiscal stimulus may be sufficient to stimulate the economy, said DK Joshi, chief economist at Crisil Ltd. “Calibrating the fiscal support measures, starting with a package for the worst hit segments is good, but it will have to be topped up in both scale and scope,” said Joshi.
{{/usCountry}}Given the uncertainty around how the pandemic may play out in the coming days, it may not be feasible to precisely quantify how much fiscal stimulus may be sufficient to stimulate the economy, said DK Joshi, chief economist at Crisil Ltd. “Calibrating the fiscal support measures, starting with a package for the worst hit segments is good, but it will have to be topped up in both scale and scope,” said Joshi.
{{/usCountry}}Crisil has forecast a 1.8% growth for FY21 and expects FY20 growth to be below the official estimate of 5% made in February.
Several economists have endorsed the Union government scaling up its spending to help revitalise the economy, including by monetising a part of its debt.
“In the case of badly-hit service industries, we may have to intervene to avoid large insolvencies arising out of cash and liquidity crunch, which these firms may face if the decline in demand persists. All of this has to be done in line with the principle of cutting the coat according to availability of the cloth,” Rajiv Kumar, vice-chairman of think tank NITI Aayog said in an interview published in Mint on April 12.
States were facing a funds crunch due to sluggish economic growth that had set in before the coronavirus outbreak. This intensified with the national lockdown since March 25. Besides the decline in goods and services tax collections due to the fall in consumption, states are also likely to feel the pinch of the Centre’s fiscal woes as they are eligible for 42% of the Union government’s pool of divisible tax revenue.
A sharp decline in the consumption of petrol and diesel during the lockdown as well as the ban on liquor sales are also hitting state coffers.