Finance Commission feels that states can use the escape clause stated under FRMB law for Covid-19 spending. The Fifteenth Finance Commission had online meetings with its Advisory Council on 23-24 April 2020 and discussed various issues confronting the Commission. N K Singh, chairman of the Fifteenth Finance Commission (FFC) which is working to strengthen cooperative federalism and build a new India by 2022 and does not stand in favour of RBI lending as it will pull down the economy and constitutionally could not reach to its aims by the end of 2022. The advisory 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.
Once the lockdown is lifted, only a gradual recovery can be expected, depending on how soon the workforce returns to work, restoration of supplies of intermediates and cash flows and the demand for output takes place.
The Council appraised the FC of its various suggestions on public expenditure and support to the economy , mainly the escape clause where in the limit for the fiscal deficit is 3 per cent and there is an escape clause to raise the deficit up to 50 basis points in exceptional situations. It batted for expenditure support to small scale firms and non-banking financial companies (NBFCs) to help them tide over their cash flow problems.
Secondly measures should be appropriately taken for NBFC’s and financial institutions to avoid bankruptcies and deepening of non performing assets. 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, the council members suggested.
Besides the healthcare costs states also have to look upon the condition of the industries and businesses which were hit by the nationwide lockdown as a nation we need to think of the additional options to finance the deficit to revive the economy. Keeping a careful watch over the state and centre is an adequate provision to help government manage cash flow mismatches.
However, FC Chairman NK Singh stated that he is not in favour of the Reserve Bank of India (RBI) lending to the Centre directly as part of deficit financing mechanism even though the option is available in the FRBM Act.
All the members were unanimous in suggesting that the real Gross Domestic Product (GDP) growth projections made before March 2020 need to be relooked and revised considerably. Among the suggestions to the Council it is important to withhold support mechanism to help overcome the economy from such crisis.