Journalism of Courage
This is an archive article published on April 25, 2020
‘Govt finances to be under strain, states can use FRBM escape clause’
The chairman of 15th Finance Commission, N K Singh, said states should initiate the 0.5 per cent escape clause for expanding their respective fiscal limits and that borrowing directly from the Reserve Bank of India is not the preferred option.
The Commission’s Chairman, NK Singh, said there’s no dispute that states’ revenues have shrunk. (File)
Stating that the impact of the COVID-19 pandemic on government finances would be significant, the economic advisory council of the 15th Finance Commission, after its two-day meeting, on Friday noted that fiscal response to the crisis has to be nuanced and it is important “not only to look at the size of fiscal response but also carefully at its design”.
The Commission’s Chairman, N K Singh, said states should initiate the 0.5 per cent escape clause for expanding their respective fiscal limits and that borrowing directly from the Reserve Bank of India is not the preferred option.
The council noted that economic activity will be subdued and there will be a large shortfall in tax revenues. Most of the growth estimates and revenue buoyancy projections by the Commission for FY21 are unlikely to hold, Singh said, adding that there’s no dispute that states’ revenues have shrunk and their share from the central taxes would be lower.
States have the provisions for escape clauses for expansion of their fiscal limits to 3.5 per cent of GSDP from 3 per cent and they will need to initiate the process, he said. He added that any expansion beyond that to, say, 5 per cent as demanded by states would require amendments to the states’ FRBM laws and permission from the Centre under Article 293(3) of the Constitution.
On the issue of monetisation of deficit by the government directly borrowing money from the central bank, Singh said that Section 5 of the FRBM Act allows RBI to directly lend money to the government under exceptional circumstances. “Whether it should be acted or not acted upon, or would be the most preferred option, in my view, it’s not.”
The council suggested special focus on small scale enterprises and NBFCs. It noted that small enterprises were cash-starved even prior to the onset of COVID-19. “As their activity levels and cash flows are affected, it is important that a support mechanism be devised to help them overcome this problem,” a statement said.
“In order to avoid bankruptcies and deepening of NPAs in the financial sector, measures should be appropriately designed,” it said.
© The Indian Express (P) Ltd
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