Covid-19 lockdown: Finance panel calls for extra support to small businesses
In its two-day meeting that ended on Friday, the advisory council felt that the magnitude of the impact of the ongoing Covid-19 lockdown on public finances is uncertain, but will certainly be significant.Updated: Apr 25, 2020 06:09 IST
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 fallout of the Covid-19 pandemic and focus on designing a stimulus package as much as on the size of it.
In its two-day meeting that ended on Friday, 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 note.
The finance ministry is conducting frequent meetings with the Prime Minister’s Office (PMO) to finalise the 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 the Covid-19 pandemic.
Industry lobby Confederation of Indian Industry (CII), in a note on Thursday, suggested urgent fiscal interventions, including cash transfers of Rs 2 lakh crore to the Jan Dhan-Aadhaar-Mobile (JAM) accounts, additional working capital limits for MSMEs, equivalent to April-June wage bill of borrowers, backed by a government guarantee, at 4-5% interest.
The Commission also observed that since small scale enterprises were cash-starved even before the covid-19 outbreak, it is important that a support mechanism be devised to help them as their cash flows have been affected. “Non-banking financial firms are affected by the slowdown. To avoid bankruptcies and deepening of non-performing assets in the financial sector, measures should be appropriately designed. Measures like partial loan guarantee may help. The Reserve Bank will have a key role in ensuring financial institutions are well-capitalised,” the Commission said.
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Two presentations were made at the meeting, one by chief economic adviser (CEA) in the finance ministry K Subramanian on key macroeconomic variables, and another by NITI Aayog member Ramesh Chand on initiatives in agriculture sector. Briefing reporters, FFC chairman NK 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 March quarter GDP print, which will be available by end May, to make its estimates for FY22.
He said the 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 central and state governments need to be watched carefully. “As of now, adequate provision for ways and means advances can largely help governments manage cash-flow mismatches. As we move ahead, we need to think of options for financing the additional deficit. It is important to ensure the states get access to adequate funds to undertake their fight,” it added.