\u201cWhen the GDP growth increases, the government feels\nit is structural and when GDP growth falls, it feels it is cyclical.\u201d<\/p>\n\n\n\n
-Dr. Y.V. Reddy, former RBI governor at SBI Conclave, 2019<\/p>\n\n\n\n
The above statement just becomes a good pick amidst the slowdown gloom\nfor the reason\nthat it highlights the classic\nblame game where our government is not really ready to acknowledge\nthe slowdown. The severity of recent \u2018quasi\nrecession\u2019 has gathered\neyeballs of policymakers from all spheres and the very debate between\nit being structural or cyclical has\nopened the house for policy debate\nas well. As Dr. Y.V. Reddy said,\nthe current slowdown\nappears to be a\ncombination\nof structural and cyclical factors,\nI believe it is structural in large parts. This is so\nbecause its effects\non unemployment, consumption, investment and other\nmacroeconomic variables look more\npermanent and persistent, with no quick\nreturn to their\nlong term trend positions. These structural changes\ncannot be easily\noffset by monetary\nand fiscal policies alone, and thus\nwould require pulling\neither lever with\ngreat caution and good understanding of macroeconomics.<\/p>\n\n\n\n
Whether or not a\ncounter-cyclical government spending boost or an expansionary monetary policy is going to bring an uptick in growth, makes\nus question the existing monetary\nand fiscal policy frameworks. In my opinion,\nto a larger extent our new monetary\npolicy framework with inflation targeting approach is to blame\nfor what has resulted in too high\nreal interest rates\nfor a long time, thus affecting the private sector\ninvestment and domestic\nconsumption. On the top\nof it, a weak monetary policy\ntransmission mechanism offers no good way out through successive rate cuts but to only keep inflation within\nidealized bounds, neglecting growth. This calls for a rethinking of monetary policy\nwith a focus on multiple\ntargets and not inflation alone before this\nlever dies a slow death\nas it has been lately.\nAdditionally, the Fiscal\nResponsibility and Budget\nManagement (FRBM) act constraints the government for a combined\nfiscal deficit to be\nat 3% of GDP, although now aimed at 3.3% of GDP by 2020. Given this\nrestriction, monetary policy will have to bear the burden as has been\nevident from recent\nsuccessive rate cuts. The\nFRBM act can thus be made more\nnuanced in terms\nthat the composition of fiscal deficit too be taken care\nof, with capital\nexpenditure taking the lead. That\nwould offer a rather\nplausible way to look at fiscal expenditures with due monitoring of prudent fiscal\ndiscipline per se.
<\/p>\n\n\n\n
The simplified bottom\nline is here.\nWhile slow growth\nwith high inflation suggests supply side rigidities, slow growth with\ninflation below target\nsuggests demand weakness. India is in the\nlatter scenario wherein\nIndians are not spending on consumption goods by either\nsaving with increased cash\nholdings, or maybe\nsome don\u2019t even\nhave money to begin with.\nWe need jobs and people on jobs at the same time\nto create buyers for the goods firms produce, and confidence in financial markets to channelize these workers\u2019 savings\ninto productive investment opportunities. This\ncalls for the economy to rise as a whole\nand not in parts by launching an aggressive reforms\npackage. That entails\nlong due reforms\nin land, labour,\ncapital markets and agriculture. Moreover, it\u2019s\ntime to up public spending on healthcare, education and skill development as these have high multiplier effects\nin the long run. Overall,\nIndia needs to address this holistically by pulling both\nthe levers thoughtfully or we may soon be \u2018off-stable\npath\u2019 and not necessarily in a \u2018disequilibrium\u2019.<\/p>\n","protected":false},"excerpt":{"rendered":"
The simplified bottom line is here. While slow growth with high inflation suggests supply side rigidities, slow growth with inflation below target suggests demand weakness.<\/p>\n","protected":false},"author":37,"featured_media":21650,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","footnotes":""},"categories":[3,48],"tags":[196,197,186,97],"class_list":["post-62375","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-indian-economy","category-public-finance","tag-fiscal-policy","tag-fiscal-policy-vs-monetry-policy","tag-global-slowdown","tag-monetary-policy"],"yoast_head":"\n