From UPSC perspective, the following things are important :
Prelims level : New Monetary Framework
Mains level : Paper 3- Economic recovery and challenges ahead
Ahead of the Budget, the article discusses the status of Indian economy and suggests the measures to be adopted in the budget to speed up the recovery.
Estimates of damages and signs of economic recovery
- The first advance estimates of national income published on January 7 project a contraction of 7.7% for real GDP.
- The Q2 GDP estimates published by the National Statistical Office had suggested an economic recovery in India.
- An improvement in the rate of contraction from 23.9% in Q1 to 7.5% in Q2 was seen as the beginning of a sustained recovery.
- The Ministry of Finance, in its Monthly Economic Review highlighted it as signifying a ‘V’ shaped recovery and as a reflection of the resilience and robustness of the Indian economy.
- The Monetary Policy Statement of the Reserve Bank of India (RBI) released on December 4, 2020 also projects positive growth in the remaining quarters of the financial year.
State of the economy before pandemic
- Growth rate of the economy had collapsed from 8.2% in Q4 of 2017-18 to a mere 3.1% in Q4 of 2019-20, sliding continuously for eight quarters.
- The policy stance against this backdrop was premised on the hope that private corporate investment will pick up momentum sooner than later.
- The RBI did the heavy lifting through five consecutive lowering of repo rate along with liquidity infusion programmes.
- However, monetary-fiscal linkages are crucial to catalyse the demand.
Crucial role played by the RBI
- While being cautious of inflation, the RBI has decided to continue the accommodative stance in its latest monetary policy to support growth.
- The CPI inflation after crossing 7% has cooled off to 4.6% in December.
- Still, the real interest rates remain very low.
- The efficacy of the new monetary framework (NMF) — the agreement between the RBI and Government of India in February 2016 to adopt inflation targeting in India — will be reviewed in March 2021, and we flag the need for revising the framework.
- The RBI is continuing its liquidity infusion programmes including the on-tap Targeted Long Term Repo Operations (TLTRO).
- This programme announced on October 9, 2020 for five stressed sectors has been extended to 26 stressed sectors notified under the Emergency Credit Line Guarantee Scheme (ECLGS 2.0).
- The RBI is also continuing its ‘operation twist’ with Open Market Operations (OMO) of ₹10,000 crore scheduled for December 17, 2020.
- Nevertheless, the RBI Governor has rightly pointed out that the signs of recovery are far from being broad-based.
Stimulus for targeted state intervention
- According to the International Monetary Fund’s Fiscal Monitor Database of Country Fiscal Measures, the fiscal stimulus for India is 1.8% of GDP.
- The IMF, in its Fiscal Monitor, highlights the need to scale up public investment to ensure successful reopening, boost growth and prepare economies for the future.
- What we need is stimulus not based on “business cycle” but from the perspective of much needed targeted state interventions in public health, education, agriculture and physical infrastructure, and to redress widening inequalities.
- As private final consumption expenditure is sluggish, contracting 26.7% and 11% in Q1 and Q2, respectively, a “fiscal dominance” is expected in India for sustained economic recovery.
- However, India cannot afford fiscal stimulus at the rates of advanced economies, due to a lack of fiscal space.
- Plummeting private corporate investment in India is a matter of concern.
- The fear of financial crowding out emanating from high fiscal deficit is misplaced in the context of India.
- Economic recovery will be determined by the degree of containment of the pandemic and the sustained macroeconomic policies.
- Any abrupt withdrawal of ongoing economic policy support, both by the monetary and fiscal authorities, will be detrimental to growth in times of the pandemic.
- The fiscal rules at the national and subnational government levels need to be made flexible.
Consider the question “Recovery of Indian economy battered by the pandemic has not been complete. Suggest the fiscal measure to be adopted by the government to speed up the recovery.”
The fiscal stimulus needs to continue in FY 2021-22 to speed up India’s recovery along with the measures suggested above.