New Delhi, Even before the government finalises next phase of economic package for the small scale enterprises, the advisory council of the 15th Finance Commission has strongly favoured a state-funded support mechanism for the sector to restart activity and improve cash flows affected by lockdown due to Covid-19 outbreak.

In its virtual meeting with the chair and members of the Commission, the advisory council also suggested institution of partial loan guarantee scheme to keep country's NBFCs well capitalised while it also advocated new funding options to finance deficits of the state that may rise because of additional expenditure on Coronavirus relief measures.

"Small scale enterprises were cash-starved even prior to the onset of Covid. 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 government statement, highlighting suggestions of the council, said.

With regard to NBFCs, the council said its suggestions were designed to avoid bankruptcies and deepening of NPAs in the financial sector. The Reserve Bank of India will have a key role in ensuring that financial institutions are well-capitalised, it said.

The council met on April 23-24 and also discussed various issues confronting the Commission now. The meeting was attended among others by the 15th Finance Commission Chairman N.K. Singh and all members and senior officials of the Commission. From the Advisory Council, Sajjid Z. Chinoy, Prachi Mishra, Neelkanth Mishra, Omkar Goswami, Arvind Virmani, Indira Rajaraman, D.K. Srivastava, M. Govinda Rao, Sudipto Mundle and Krishnamurthy Subramanian joined the meeting on different days.

These were the second round of meetings with the Advisory Council, after the submission of the Report of the Commission for the year 2020-21.

During the meeting, members of the Advisory Council felt that the impact of the Covid pandemic and the national lockdown on the Indian economy can come through the slowdown in the domestic activity, its impact on the cash flows of financial institutions and business enterprises and the loss of global demand for Indian products because of a steep global recession.

All of them were unanimous to suggest that the projections of real GDP growth made before March 2020 need to be relooked into entirely, and, revised downwards considerably.

Once the lockdown of the economy is ended, the recovery can only be expected to be gradual, depending on the ability of the workforce to get back to work soon, restoration of supplies of intermediates and cash flows and, of course, the demand for output. Therefore, the full magnitude of the economic impact of Covid will only be clear only over a course of time.

The Advisory Council also felt that the magnitude of the impact of these developments on public finances is uncertain, but will certainly be significant. Governments will have substantial expenditure burden on account of health, support to poor and other economic agents.

The Council Members felt that the shortfall in tax and other revenues will be large due to subdued economic activity. Hence, fiscal response to the crisis should be much more nuanced. It is important not just to look at the size of fiscal response but also carefully at its design, it suggested.

The Council also felt that it is likely that different States may come out of the severity of the impact of the pandemic in different stages. Hence, the revival of activity in different States will be at varied pace.