On April 24, 2020, the Finance Commission has advised the state governments to use the clauses of FRBM (Fiscal Responsibility) act in order to raise additional resources to fight against COVID-19.
Centre and State FRBM
The states have their own FRBM act. The main similarities between the centre and state FRBM is that the limit of fiscal deficit is 3% and the governments can raise the deficit up to 50 basis points. The State governments have been advised to use this clause. With this permissible amount of fiscal deficit, the state governments will have funds in hand.
Issues identified by the Finance Commission
The Finance Commission has identified the following possible issues during the meeting with its advisory council
- The small-scale industries were cash starved even before COVID-19 crisis. Therefore, the commission suggests a support mechanism to help solve cash flow problems.
- The Commission also suggests measures to avoid bankruptcies. It suggests partial loan guarantee.
- The pace of revival in different state may vary differently. Therefore, an adequate provision to help governments manage cash flows is important.