Financial aid required to deal with COVID-19-induced slowdown in India, says Finance Commission’s advisory panel

Financial aid required to deal with COVID-19-induced slowdown in India, says Finance Commission’s advisory panel

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NEW DELHI : Even as the government faces a tough challenge of supporting an already-slowing economy stalled by the Covid-19 pandemic, NK Singh said borrowing money from the Reserve Bank of India is not the preferred option. Section 5 of the Fiscal Responsibility and Budget Management Act allows RBI to directly lend money to the government under exceptional circumstances. This would mean the RBI directly buying government bonds in the primary market.

“Whether it should be acted or not acted upon, or would be the most preferred option? In my view, it’s not,” Singh, chairman of the Fifteenth Finance Commission, said. India has imposed the world’s strictest lockdown to contain the new coronavirus outbreak, halting economic activity. While the government is working on measures to lift the economy, it lacks funds to announce a big stimulus. Economists, including former Chief Economic Adviser Arvind Subramanian, have supported monetary financing of the government deficit or the RBI directly buying government bonds.

Financial aid required to deal with COVID-19-induced slowdown in India, says Finance Commission’s advisory panel

Financial aid required to deal with COVID-19-induced slowdown in India, says Finance Commission’s advisory panel

Subramanian also suggested it should be used to finance additional deficits of states who saw borrowing costs surge in the first bond auction of the year. Singh, however, said states can invoke the escape clause in the FRBM Act, 2003 that allows them to deviate 0.5 percent, under exceptional circumstances, from their fiscal deficit target. If they decide to exercise this option, they will require the permission of the central government under Article 293 (3) of the Constitution, he said. Some states have demanded that the central government should increase their market borrowing limit to 5 percent of the state GDP from 3 percent. Singh said this would require a complete revamp of state FRBM Act.

The cost of borrowing for states is high, and increasing the limit to 5 percent will still pose a similar challenge. Stress On Carefully Designed Fiscal Stimulus The Economic Advisory Council to the 15th Finance Commission, in a meeting today, highlighted the importance of a carefully designed fiscal response, and not just its size, given that the shortfall in the government’s revenue will be high due to subdued economic activity.

Financial aid required to deal with COVID-19-induced slowdown in India, says Finance Commission’s advisory panel

Financial aid required to deal with COVID-19-induced slowdown in India, says Finance Commission’s advisory panel

The members of the council, including Chief Economic Adviser Krishnamurthy Subramanian, Sajjid Chinoy, Prachi Mishra, Neelkanth Mishra and Omkar Goswami, among others, suggested: Helping small businesses overcome their cash flow problems that they were facing even before the pandemic. Measures like partial loan guarantee may help avoid bankruptcies and deepening of NPAs in the financial sector.

Appropriately designed measures to help non-banking financial companies affected by the slowdown. Need to think of options for financing the additional deficit. It is important to ensure that the states get access to adequate funds to fight the pandemic.
BloombergQuint

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