Experts for fiscal push as monetary support reaches 'limits'

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SME Times News Bureau | 04 Jun, 2021
With the return of concerns of growth prospects amid the second wave of Covid-19, demands have grown for government support to the economy in the form of fiscal measures.

According to experts, the need for the government to pitch is much more required now as the monetary support from the Reserve Bank of India have reached their "limits" with inflationary concerns still hovering.

The latest SBI Ecowrap report noted that although the RBI has taken many measures to reinvigorate credit offtake, it continues to be low because corporates have deleveraged by repaying high-cost loans through funds raised through bond issuances.

"Corporate willingness for new investments remains low among all-pervasive uncertainty. Only fiscal policy can rekindle animal spirits at this juncture - monetary policy has almost nil headroom," said the report authored by SBI's Chief Economic Advisor, Soumya Kanti Ghosh.

There was no change in the key policy rate at the second MPC meeting for this fiscal, with the central bank emphasising on an accommodative stance as long as required to support the economy.

The RBI, however, reduced its projection of real GDP growth for FY22 by 100 bps to 9.5 per cent.

The central bank expects a vaccination-driven recovery post September and that should help to normalise economic activity quickly.

The SBI report said: "We are, however, skeptical of a sharp pick-up in growth outlook in Q3 given the devastation in rural economy and the slow vaccination. Thus, the RBI forecast of 9.5 per cent could be more of a sombre signaling of a weak growth outlook as of now."

In terms of fiscal support, the report has suggested the use of automatic stabiliser route to manage fiscal levers.

"This would mean that fiscal deficit can purely go up via the automatic fiscal stabiliser route whereby a reasonable cut in fuel prices or even GST tax waivers for stressed entities could work wonders," the report said.

The loss in revenue for growth collapse is not in the hands of government and hence, it may be worthwhile to support fiscal policy through tax adjustments. Otherwise, economic recovery will continue to be hamstrung at fuel prices more than Rs 100 when the economy opens up after lockdown, it said.

RBI Governor Shaktikanta Das, in his statement post the Monetary Policy Committee meeting on Friday, also said: "The MPC was of the view that at this juncture, policy support from all sides is required to regain the momentum of growth that was evident in H2:2020-21 and to nurture the recovery after it has taken root."

He was also of the view that government should boost exports with a targeted policy support on an urgent basis.

Das said that with external demand strengthening, a rebound in global trade is taking hold, which should support India's export sector.

"The need of the hour is for enhanced and targeted policy support for exports. It is opportune now to give further policy push by focusing on quality and scalability," he said.