As the government chalks out the plan to announce next phase of stimulus package to bring the economy back on track, the advisory council of the 15th Finance Commission has recommended several measures in which this can be done, including state-funded support mechanism for small-scale enterprises, partial loan guarantee to NBFCs, and funding for states to undertake the fight against the coronavirus pandemic.
The members "unanimously" suggested the "projections of real GDP growth made before March 2020 needed to be relooked into entirely, and, revised downwards considerably". It was keenly watching the evolving situation globally as well as domestically, the Finance Commission said.
"In its online meeting, the advisory council felt that the impact of the COVID-19 pandemic and the national lockdown on the Indian economy can come through the slowdown in the domestic activity, its impact on the cash flows of financial institutions and business enterprises and the loss of global demand for Indian products because of a steep global recession," a statement by the Finance Commission said.
The council said after the lockdown, the recovery could only be gradual. Therefore, the full magnitude of the economic impact of COVID-19 would be clear only over a course of time, it said.
The council apprised the Finance Commission of the different suggestions floating around in terms of public expenditure support to the economy. It suggested four measures for effectively managing economic crisis caused by the coronavirus-led nationwide lockdown:
Support mechanism for small firms
The council opined that small-scale enterprises were cash-starved, even prior to the onset of COVID-19. As their activity levels and cash flows were affected, it was important to overcome this problem, it said.
Partial loan guarantee scheme for NBFCs
The Finance Commission said measures like partial loan guarantee might help crisis-hit non-banking financial companies (NBFCs) to avert bankruptcies and mounting bad loans in the financial sector. "The Reserve Bank of India will have a key role in ensuring that financial institutions are well-capitalised," it said.
Ensure sufficient funds to states
The council suggested finances of the Centre and state governments needed to be watched carefully. It was important to ensure the states get access to adequate funds to undertake their fight against the pandemic, it said.
Revival of economic activities
The council felt it was likely that different states might come out of the severity of the pandemic impact in different stages. Hence, the revival of activity in different states would be at varied pace. The advisory council opined the magnitude of the impact of these developments on public finances was uncertain but would certainly be significant.