Government think tank Niti Aayog on Thursday made a case for extraordinary steps to deal with the unprecedented stress in the financial sector which has resulted in an economic slowdown in the country.

The government needs to take steps which eliminate apprehension from the minds of private sector players and encourage them to step up investments, Niti Aayog vice-chairman Rajiv Kumar said.

He also said private investments will drive India out of the middle-income trap.

Terming the stress in the financial sector as unprecedented, he said nobody had faced this sort of situation in the last 70 years where the entire financial system was under threat.

"Nobody is trusting anybody else... within the private sector nobody is ready to lend, everyone is sitting on cash...you may have to take steps which are extraordinary," he said at an event here.

Elaborating further, Kumar said some of the steps have already been announced in the Union Budget to address stress in the financial sector and give a push to economic growth which hit a 5-year low of 6.8 per cent in 2018-19.

Explaining how stress in the financial sector has led to a slowdown in the economy, the Niti Aayog vice chairman said the entire episode started with indiscriminate lending during 2009-14 leading rise in non-performing assets (NPAs) post 2014.

Rising NPAs reduced the ability of banks to do fresh lending, he said, adding the space was occupied by the shadow banks with credit growth of 25 per cent.

The non-banking finance companies (NBFCs) could not manage this high loan growth leading to defaults by some of the large entities triggering slowdown in the economy eventually.

"The whole nature of the game has changed after demonetisation, the Goods and Services Tax and the Insolvency and Bankruptcy Code. The earlier period where you had 35 per cent cash sloshing around, it has become much less now. All of these put together it is a fairly complex situation. There is no easy answer," he said.

On the issue of delay of payments by the government and its departments to private sector in lieu of goods and services availed from them, he said, it could be one of the reasons for the slowdown but the authorities are making all efforts to expedite the process.

"I have no hesitation in saying that there is no business of the government to hold back payments which are due to the private sector. At the moment, there is huge effort going on to try and get this sorted out," he said.