New Delhi: The Fifteenth Finance Commission (XVFC) and its Advisory Council on Friday met online and cautioned against the adverse impact of Covid-19 pandemic and national lockdown on economy, cash flows of financial institutions and business enterprises, and international business. The members unanimously suggested that the projections of real GDP growth made before March 2020 needed to be relooked into entirely, and, revised downwards considerably.
“Once the lockdown of the economy is released, the recovery can only be excepted to be gradual, depending on the ability of the workforce to get back to work soon, restoration of supplies of intermediates and cash flows, and, of course, the demand for output. Therefore, the full magnitude of the economic impact of Covid will only be clear only over a course of time,” their release stated.
The Advisory Council also felt that the magnitude of the impact of these developments on public finances was uncertain, “but will certainly be significant”. It was of the view that Governments will have substantial expenditure burden on account of health, support to poor and other economic agents. Moreover, the shortfall in tax and other revenues will be large due to subdued economic activity.
“It is important not just to look at the size of fiscal response but also carefully at its design,” the Council said and added that it had apprised the Finance Commission of the different suggestions floating around in terms of public expenditure support to the economy.
They felt that the following considerations would be very important:
(a) 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.
(b) 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.
(c) The finances of 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.
(d) The Council also felt that it is likely that different States may come out of the severity of the impact of the pandemic in different stages. Hence, the revival of activity in different States will be at varied pace.
“Fifteenth Finance Commission along with its Advisory Council is keenly watching the evolving situation globally as well as domestically,” it stated.
The meeting was chaired by N. K. Singh, Chairman XVFC and was attended by all members and senior officials of the Commission. From the Advisory Council, Dr. Sajjid Z Chinoy, Dr. Prachi Mishra, Mr. Neelkanth Mishra and Dr. Omkar Goswami joined the meeting on 23rd April, 2020 and Dr. Arvind Virmani, Dr. Indira Rajaraman, Dr.DK Srivastava, Dr. M Govinda Rao, Dr. Sudipto Mundle and Dr. Krishnamurthy Subramanian joined the meeting on 24th April, 2020. These were the second round of meetings with the Advisory Council, after the submission of the Report of the XVFC for the year 2020-21.