Fiscal wheels must also roll in order to make monetary policy effective.

GS-III: Fiscal wheels must also roll in order to make monetary policy effective

Context

Through four successive reductions in this year, RBI has reduced the repo rate by 110 basis points to 5.4%.

Status of the rate cut

The economy has been slow to respond to these incremental monetary stimuli.
Quarterly growth data show a continuing slowdown, mainly driven by sluggish demand, due to both external and domestic factors.
There is substantial excess capacity in the manufacturing sector.
With unutilized capacity, temporary and casual employees are being laid off and wage hikes are being postponed, reducing levels of aggregate disposable income, which is further reducing demand, particularly for consumer durables.
Unless capacity utilization improves, investment demand from the private sector is not likely to improve.
Repo rate reductions only provide enabling conditions to reduce the cost of borrowing. To be effective, adequate transmission needs to take place.

Limitations of Monetary Policy

Demand for investment and consumer durables has to increase, which is a function of income, much more than the cost of borrowing. For this, momentum has to be generated at the fiscal side.
Due to revenue constraints and legislative limits on borrowing, suitable countercyclical fiscal measures have not yet been taken.
Without a demand push from the public sector, monetary policy alone would not be effective.

What the government should do:

The countercyclical policy is primarily the responsibility of the central government.
A one-year departure from the budgeted fiscal deficit of 3.3% of GDP for 2019-20 can be justified at the current juncture.
It should be ensured that the entire additional borrowing above the budgeted level is spent on capital expenditure.
It is established fact that increases in government capital expenditures have much larger multiplier effects, as compared to increases in government revenue expenditures.
State governments and the central and state public enterprises should come on board and undertake additional investment spending on infrastructure.
This will push investment from the private sector, uplifting the infrastructure and construction sectors, and later spreading out to other sectors.

Together, the joint impact of the fiscal and monetary stimuli is expected to uplift the country’s growth from its present low level to levels comfortably above 7% and, eventually, closer to 8.5-9%. Sustaining growth at these levels is required if India were to become a $5-trillion economy by the end of FY25.

Source: Live Mint

Join Our Telegram

Why we need to look beyond the ‘electric’ smokescreen

India enters 37-year period of demographic dividend

Oceanic Anoxic Event 1a and MASS EXTINCTION

25 Dec, 24
SHARE

Oceanic Anoxic Event 1a from the Paris Basin (Environment) Paper-3 PMP OAE 1a refers to a period during the Cretaceous Period (145 million years ago and ended 66 million years ago) when Earth's oceans became depleted of oxygen, causing a significant disruption in marine life. Cause: The event is believed to have been

Viksit Panchayat Karmayogi (Good governance)

26 Dec, 24
SHARE

Viksit Panchayat Karmayogi (Good governance) Governance GS PAPER-2 PMP Dr. Jitendra Singh launched the ‘Viksit Panchayat Karmayogi’ initiative on Good Governance Day, celebrated to mark the 100th birth anniversary of former Prime Minister Atal Bihari Vajpayee. The initiative, which is part of the broader ‘Prashasan Gaon

Major programmes to control Air Pollution

23 Dec, 24
SHARE

Major programmes to control Air Pollution National Clean Air Programme? It was launched by the Ministry of Environment, Forests and Climate Change (MoEFCC) in January 2019. It is the first-ever effort in the country to frame a national framework for air quality management with a time-bound reduction target. The

Air pollution and Air quality Measures in India

21 Dec, 24
SHARE

Air pollution and Air quality Measures in India (Environment) GS Paper-3 P-M-P Air pollution may be defined as the presence of any solid, liquid or gaseous substance including noise and radioactive radiation in the atmosphere in such concentration that may be directly and/or indirectly injurious to humans or other l

Geopolitical Significance of Ports

20 Dec, 24
SHARE

Geopolitical Significance of Ports (IR) Act as geopolitical assets: Ports enhance the projection of strategic reach, which helps strengthen the country’s control over important sea and energy supply routes. E.g. Indian Navy’s staging base at Agalega Islands will enable marine patrols