MUMB AI: The economic advisory panel of the 15th Finance Commission has suggested that the government should look to support small enterprises and avert bankruptcies in the financial sector as part of the fiscal response to deal with the coronavirus crisis.
At its two-day meeting held via video conferencing, the members of the Advisory Council felt that the shortfall in tax and other revenues will be large due to subdued economic activity and hence the 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 Advisory Council also felt that the magnitude of the impact of these developments 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," an official statement issued after the meeting said.
The council felt that the COVID-19 pandemic and the national lockdown would slow down domestic activity and impact cash flows of financial institutions and businesses, besides loss of global demand for Indian products because of a steep global recession. "All of them were unanimous to suggest that the projections of real GDP growth made before March 2020 need 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," the statement said.
Among the suggestions made to the commission, the council members said small scale enterprises were cash-starved even prior to the onset of the pandemic. "As their activity levels and cash flows are affected, it is important that a support mechanism be devised to help them overcome this problem," it said.
Also, non-banking financial companies are affected by the slowdown and 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.