15th Finance Commission Meeting Highlights: Recovery of economy to be gradual, real GDP growth to be revised
15th Finance Commission Meeting Highlights: The advisory council has suggested development of a support mechanism to help cash-starved small-scale enterprises.
15th Finance Commission Meeting Highlights: The 15th Finance Commission held virtual meetings with its advisory council on April 23-24, 2020. The two-day meeting chaired by Finance Commission Chairman NK Singh discussed various issues related to the impact of COVID-19 pandemic on the growth of India’s Gross Domestic Product. The meeting was attended by all members and senior officials of the Commission.
Four members of the commission’s advisory council- Neelkanth Mishra, Dr. Omkar Goswami, Dr. Sajjid Z Chinoy and Dr. Prachi Mishra attended the virtual meeting on April 23, while the remaining members including Dr. Krishnamurthy Subramanian, Dr. Indira Rajaraman, Dr. Arvind Virmani, Dr.DK Srivastava, Dr. Sudipto Mundle and Dr. M Govinda Rao attended on April 24.
This is the 15th Finance Commission’s second round of meetings with the Advisory Council, after the submission of its report for the year 2020-21.
1. Implications of the Coronavirus pandemic on India’s GDP growth in 2020-21 and 2021-22 and uncertainty about macro variables over time.
2. What should be the public expenditure fillip to shore up the economy?
3. Possible assumptions for tax buoyancy and revenue in the current year and next year.
Recovery of Economy to be Gradual: Advisory Council
• According to the advisory council members, the impact of COVID-19 pandemic and the ensuing national lockdown may come through a slowdown in the domestic activity, its impact on the cash flows of financial institutions and business enterprises and loss of global demand for Indian products due to steep global recession.
• The members unanimously suggested that projections of real GDP growth made before March 2020 need to be re-looked into entirely and revised downwards considerably.
• The advisory council members felt that once the lockdown is lifted, the recovery of the economy will be gradual, depending on the ability of the workforce to get back to work soon, restoration of cash flows, supplies of intermediates and demand for output.
• Hence, the full magnitude of the economic impact of coronavirus will only be clear only over a course of time.
Impact on Public Finances: Massive shortfall in tax, other revenue
• According to the Finance Commission’s advisory council members, the magnitude of the impact of COVID-19 outbreak on public finances is uncertain currently.
• They, however, felt that the governments will have substantial expenditure burden on account of health, support to poor and other economic agents.
• Further, they felt that there will be a massive shortfall in tax and other revenues due to subdued economic activity. Hence, they suggested that the fiscal response to the crisis should be much more nuanced.
• The council members suggested that it is important not to just look at the size of fiscal response but also carefully at its design.
• The advisory council further apprised the Finance Commission regarding the different suggestions floating around in terms of public expenditure support to the economy.
Following are some of the key suggestions made by the advisory council members:
1. Development of a support mechanism to help cash-starved small-scale enterprises. The small scale enterprises were cash-starved even before the COVID-19 pandemic. Their activity levels and cash flows were hit further during the health crisis.
2. Appropriate measures to be formulated to avoid bankruptcies and deepening of Non-Performing Assets (NPAs) in the financial sector such as partial loan guarantee. The council has suggested that the RBI will play a significant in ensuring that the financial institutions are well-capitalized. The non-banking financial companies were also impacted majorly by the slowdown.
3. The council has suggested that the finances of the centre and state governments need to be watched carefully. Currently, adequate provision for ways and means advances will help the governments to manage cash-flow mismatches but more options for financing the additional deficit will need to be figured out for the future. The council members highlighted that it is important to ensure that the state governments get access to adequate funds to support their fight against the pandemic.
4. The council also noted that the revival of activity in different States will be at a varied pace, as different states may come out of the severity of the impact of the pandemic in different stages.
The economic advisory council was set up by the 15th finance commission in April 2018 to advise it on all matters related to its terms of reference. The council is also required to assist in the preparation of any paper or research study that would enhance the Commission's understanding on the issue contained in its ToR.
Composition of the Council
Krishnamurthy Subramanian: Chief Economic Adviser of Indian Government
Sanjeev Gupta: Former Deputy Director in IMF
Sajjid Chinoy: JP Morgan Chief India economist
Neelkanth Mishra: MD, India economist and strategist at Credit Suisse
Surjit Bhattal: Oxus Research and Investments Chairman, part-time member of Prime Minister's Economic Advisory Council
Pinaki Chakraborty: Professor at the National Institute of Public Finance and Policy
India’s growth forecast has been cut majorly over in the wake of COVID-19 pandemic and the resulting nation-wide lockdown. The International Monetary Fund reduced India's GDP growth projection to 1.9 percent in 2020 from 5.8 percent estimated in January 2020. The IMF has predicted the global economy to hit its worst recession since the Great Depression in 1930 due to the health crisis.
World Bank has also forecasted India’s GDP growth to be between 1.5 to 2.8 percent in 2020-21, the worst growth rate since 1991 liberalisation. The Indian economy is estimated to have grown by 5 percent in the 2019-2020 fiscal.