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States can use the escape clause under their Fiscal Responsibility Act (FRBM) to raise additional resources to fight the Covid-19 pandemic, Chairman of the 15th Finance Commission NK Singh said here on Friday.
The Centre and States have their own FRBM Acts, respectively. However, there are two similarities. One, the limit for the fiscal deficit is 3 per cent and, two, there is an escape clause to raise the deficit up to 50 basis points in exceptional situations.
“Using the escape clause will give expeditious process,” Singh said after the meeting of the Economic Advisory Council of the Commission. On whether some States are asking for a higher borrowing limit such as 5 per cent, he said this would require a new Act, which would take time to enact.
The Commission held online meetings with its Advisory Council members on Thursday and Friday and discussed various issues.
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 downward considerably.
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 apprised the Commission of its various suggestions on public expenditure support to the economy. It felt that since small-scale enterprises were cash-starved even before the Covid-19 crisis, it is important that a support mechanism is devised to tide over their cash flow problems.
Secondly, measures are also needed to avoid bankruptcies and deepening of non-performing assets (NPAs) in the financial sector. Measures such as partial loan guarantee can be considered, it said.
Thirdly, the finances of the Centre and State governments need a careful watch. As of now, adequate provision for ways and means advances can help governments to manage cash-flow mismatches.
The Council also felt that it is likely that States may come out of the severity of the pandemic impact in different stages. Hence, the pace of revival in different States will vary.
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