Finance panel's advisory council bats for support to small players, NBFCs

The Commission will wait for gross domestic product (GDP) data in the January-March and April-June quarters before finalising its reports to the government for 2021-22 to 2025-26

The recommendations made by the Fifteenth Finance Commission (FC) for the health sector, in its report for 2020-21, will require a ‘fundamental rethink’ in light of the Covid-19 pandemic, the commission’s Chairman N K Singh said on Friday.
 

Singh also said that in the past two days, there were discussions on whether the 15th FC’s other recommendations will have to be revisited as well. Singh was briefing the media after two days of deliberations with the 15th FC’s advisory council.
 

The advisory council of the FC batted for expenditure support to small scale firms and non-banking financial companies (NBFCs), whose conditions got aggravated by the Covid-induced lockdown. It, however, cautioned the government about the size of the fiscal sops.
 

In its two-day meeting, the Council felt the fiscal response to the crisis should be much more nuanced as the impact of Covid-19 on  the government’s revenues would be substantial. It also called for ensuring adequate fund flow to state governments, including allowing them to use the  escape clause, and said that at some point the governments will have to look at financing the expanding deficit.

“Small-scale enterprises were cash-starved even prior to the onset of Covid. As their activity levels and cash flows are affected, it is important that a support mechanism be devised to help them overcome this problem,” the council suggested, according to a statement issued by the FC.
 

It said NBFCs are also affected by the slowdown. “In order to avoid bankruptcies and deepening of NPAs, measures should be appropriately designed. Measures like partial loan guarantee may help. The RBI will have a key role in ensuring that financial institutions are well-capitalised,” the statement said.
 

The commission will wait for January-March and April-June quarter gross domestic product (GDP) data before finalising its recommendations in the report for 2021-22 to 2025-26.
 

He said for the states to get their fiscal deficits relaxed from 3 per cent to 5 per cent, they will have to come up with entirely new Fiscal Responsibility and Budget Management (FRBM) laws, which will be time consuming.

He suggested that states should bring their FRBM laws in line with that of the Centre after discussing with the finance ministry. They must also go for a 0.5 per cent relaxation in their fiscal targets.
 

“I won’t dispute that state finances are under stress, because their own revenues have shrunk. The Centre’s revenues have also been hit, and hence, the divisible tax pool will also be lower than what we projected. GST is also stressed,” said Singh.
 

In their various videoconference meetings with Prime Minister Narendra Modi, states have been asking for their fiscal deficit limits to be raised to 5 per cent. To go to 5 per cent will require a new FRBM Act which will take time to enact and get consent.

A faster way will be to utilise the escape clause, which they have been asking for. He also said that while states are seeking to borrow more, they should see whether there is demand for their bonds before taking a decision on that.
 

The attendees in the meetings included Chief Economic Advisor Krishnamurthy Subramanian, Sajjid Chinoy and Neelkanth Mishra of the economic advisory council to Prime Minister (EAC-PM). They also included economists Prachi Mishra and Omkar Goswami, former chief economic Arvind Virmani, Indira Rajaraman, D K Srivastava, M Govinda Rao, and Sudipto Mundle.
 

“All of them were unanimous to suggest that the projections of real GDP growth made before March 2020 need to be relooked at and revised downwards considerably.

Once the lockdown is eased, the recovery can only be excepted to be gradual. This will depend on the ability of the workforce to get back to work soon, restoration of supplies of intermediates as well as cash flows and, of course, the demand for output.
Therefore, the full magnitude of the economic impact of Covid will only be clear over a course of time,” said an official statement after the meeting.

“The council members felt that the shortfall in tax and other revenues will large be 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 statement read.
 

Addressing the media, Singh said till the Centre makes new projections, the forecasts given by Finance Minister Nirmala Sitharaman stand as the basis of the commission’s work.
 

“We will wait for the fourth quarter (previous FY) and first quarter (current FY) GDP data before coming up with credible recommendations. Whether the Centre wants to revise the forecasts it has given in the Budget is a call for the Centre to take,” Singh said.

“We have had discussions on whether the recommendations in the first report need to be revisited. What is clear is that there will need to be a fundamental rethink in the health sector recommendations in light of the Covid-19 pandemic,” Singh said.

In its report for 2020-21, the 15th Finance Commission had asked for increasing state capacity by building more hospitals and medical colleges.
 

The commission had set certain targets for the Centre and state governments to be eligible for health grants, which are supposed to be laid out in the second report. It is possible that these grants may be substantially revised upwards.