The economic advisory council of the 15th Finance Commission wants fiscal support for MSMEs to restart activity and improve cash flows. Government support was also required to prevent bankruptcies in the financial sector.

In its virtual meeting with the chair and members of the commission, the advisory council also suggested a partial loan guarantee scheme to keep the country’s NBFCs well capitalised. It also advocated new funding options to finance the deficits of the states that may rise because of additional expenditure on coronavirus relief measures.

The council was of the view that the fiscal response of the government to the crisis should be much more nuanced, not just by the size of the response but also in its design.

“The council members felt the shortfall in tax and other revenues will be large due to subdued economic activity,” an official statement after the meeting said.

While considering the stimulus measures, they said the government should consider that 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.

The non-banking financial companies are also affected by the slowdown. Measures like a partial loan guarantee may help. The Reserve Bank of India will have a key role in ensuring that financial institutions are well-capitalised.