Lockdown impact: 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.
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. The Reserve Bank of India will have a key role in ensuring that financial institutions are well-capitalised, the council members suggested. Also the finances of the central and state governments need to be watched carefully in the wake of increased spending to fight the pandemic.
“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,” it added.
Besides the healthcare cost, the government is also faced with the additional burden of giving booster or stimulus to sectors and industries hit by the nationwide lockdown.
The lockdown that began on March 25 was last week extended till May 3. Late last month, the government had announced a Rs 1.7 lakh crore stimulus package comprising free foodgrains and cooking gas to poor and cash dole to poor women and elderly. A second package, aimed at industries, is said to be in the works and will likely be announced shortly. Several international agencies including IMF and the World Bank have cut India’s growth forecast over concerns about the fallout of the COVID-19 pandemic.
The International Monetary Fund (IMF) has slashed India’s GDP growth projection to 1.9 per cent in 2020 from 5.8 per cent estimated in January, as the global economy hits the worst recession since the Great Depression in the 1930s due to the raging coronavirus pandemic. Similarly, the World Bank has estimated India’s economy to grow between 1.5 to 2.8 per cent in the 2020-21 — the worst growth performance since the 1991 liberalisation.
Fitch has projected India’s GDP to grow at 0.8 per cent this fiscal, while S&P pegs it at 1.8 per cent and Moody’s at 2.5 per cent in 2020. These growth estimates compare to an estimated 5 per cent growth rate in 2019-20 fiscal that ended on March 31. India’s economy also grew by 5 per cent in 2019 calendar year.
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, the statement said. The meeting, chaired by 15th Finance Commission Chairman N K Singh, was attended by all members of the commission.
The Economic Advisory Council members are Sajjid Chinoy, Prachi Mishra, Neelkanth Mishra, Omkar Goswami, Arvind Virmani, Indira Rajaraman, D K Srivastava, M Govinda Rao, Sudipto Mundle and Krishnamurthy Subramanian.