Finance Commission against RBI lending to Centre

NK Singh, chairman of the 15th Finance Commission, said the Fiscal Responsibility and Budget Management (FRBM) Act allows the Reserve Bank of India (RBI) to lend to the government, but he doesn’t favour such a move.

Singh said states can use the escape clause of 0.5 % over the 3% of gross state domestic product mandated target in their FRBM law for any additional spending for Covid-19 battle. Any further relaxation would need changes to the FRBM law. “Section 5 of the FRBM Act allows RBI to directly lend to the government,” Singh told reporters in a video conference on Friday after a two-day meeting of the finance commission’s economic advisory council. “In my view it (should) perhaps not be done.”

On states’ demand to raise their fiscal deficit target to as much as 5% of state GDP, he said it would be easier to avail of the 0.5% cushion enshrined in their acts. A higher relaxation, he said, would require new legislation. “The advisory council also felt that the magnitude of the impact of these developments on public finances is uncertain, but will certainly be significant,” the council said in an official release.

Nuanced Fiscal Response Needed

Shortfall in tax and other revenue will be largely due to subdued economic activity and hence the fiscal response to the crisis should be much more nuanced, it said.

The meeting, chaired by Singh, was attended by council members Sajjid Z Chinoy, Prachi Mishra, Neelkanth Mishra, Omkar Goswami, Arvind Virmani, Indira Rajaraman, DK Srivastava, M Govinda Rao and Sudipto Mundle.

“It is important not just to look at the size of fiscal response but also carefully at its design,” the council said.

Singh said the commission will wait for data from the FY20 fourth quarter and FY21 first quarter to arrive at its own growth estimate. While the first quarter will witness the sharpest shrinkage, the council had varied views on the type of recovery, with some predicting a V-shaped one and others a graph that more resembled a U or an L.

Members were unanimously of the view that projections for real GDP growth made before March need to be re-examined thoroughly and revised downward.

Chief economic adviser K Subramanian and Niti Aayog member Ramesh Chand made presentations to the council on the macroeconomic scenario and agriculture, respectively. The commission, Singh said, will be carrying out structural changes in its recommendations on the health sector in view of the pandemic.

The commission’s advisory council suggested a partial loan guarantee scheme for the non-banking financial companies (NBFC) sector and a support mechanism for small scale enterprises in view of the disease outbreak.