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Last updated: 15 Jun, 2021  

India.Growth.9.Thmb.jpg Time for a fiscal stimulus

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Bikky Khosla | 15 Jun, 2021

Inflation figures released last week came as an unpleasant surprise. Wholesale inflation rose by 12.94 percent in May from a rise of 10.49 percent in April. This is the highest rate of WPI inflation in the current series. Retail inflation, on the other hand, rose to 6.30 percent from 4.23 percent in April. No doubt, these figures are high, limiting RBI’s scope for further monetary accommodation while highlighting the importance of fiscal support to the Indian industry.

In its second MPC meeting for this fiscal, the central bank hold its key policy rates, while emphasising on an accommodative stance as long as required to support the economy. But a latest report views that with inflationary concerns still hovering, monetary supports have reached their ‘limits’. It adds that RBI will face a multiplicity of challenges to reinvigorate growth and support a stable rupee and a potential inflation uptick. These concerns sound quite logical, particularly now after release of the May inflation data.

It has also been pointed out that RBI has recently taken several measures to push credit offtake, but the effort failed to garner much result as corporates have deleveraged by repaying high-cost loans through funds raised through bond issuances. Also, corporate willingness for new investments remains low among all-pervasive uncertainty. Therefore, the report adds, only fiscal policy can rekindle animal spirits at this juncture - monetary policy has almost nil headroom.

Monetary policy works mainly through banks, but with a clear lack of appetite for investment in the private sector, only monetary interventions seems to have a limited role to play during this period. Therefore, the Centre, according to experts, should come out with a comprehensive fiscal package to support the industry, with a focus on the small and medium enterprise sector, which has been taking the brunt of the pandemic.

I invite your opinions.

 
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