There is no dearth of arguments asserting for a\ncredible central bank but on the other side of the economy, lays the fiscal\narm: the Finance\nMinistry, whose credibility needs to be discussed too, especially in light of\nthe present growth slowdown. Credibility can be defined as the commitment to\nabide by the transparently laid out rules and policy goals, or in simple terms,\nwe say an institution is credible if the general public believes it will do\nwhat it says. A glance at the recent turn of economic indicators in India,\nespecially the declining private investment and consumption growth, has worried\nboth, the central bank and the central government. Evidently, the immediate\nmonetary policy response of the RBI that follows an inflation targeting regime,\nto this, was a repo rate cut and rather, a series of repo rate cuts only until\nthis month; as the RBI wasn\u2019t left with much room for a rate cut in response to\nthe slowing economic growth. The finance ministry too took a slew of boosting\nmeasures like the corporate tax rate cut, bank recapitalization, rendering\nsupport to the NBFCs (Non Banking Financial Corporations) and the HFCs (Housing\nFinance Companies) under the partial credit guarantee scheme, IBC (Insolvency\nand Bankruptcy Code) bearing fruits and other measures as announced in the\nfinance minister\u2019s maiden budget.<\/p>\n\n\n\n
In line with the accommodating fiscal and monetary\npolicies being in action, however, when the central bank could have almost\nbreached the inflation upper bound target of 6% this month, we could hear\nquestions around the credibility of the central bank\u2019s monetary policy. On the\nparallel grounds however, when the government is eyeing exceeding the fiscal\ndeficit target of 3.3% of GDP this fiscal year, where are questions around the\nfinance ministry being \u2018credible\u2019? Although credibility would rightly be a\nmedium term concept, but such discussions need be made. <\/p>\n\n\n\n
The case in point to discuss credibility of finance ministry\nwith respect to the numbers, in my opinion is important because of a few\nreasons. Firstly, the businesses don\u2019t invest merely in response to supply side\nmeasures like cheap credit and tax cuts. Infact, going by the 101\nMacroeconomics argument, private investment is a function of both: the rate of\ninterest and future expectations of business profitability. The latter\ncovariate in the face of \u2018continued uncertainty\u2019 seems to have shaken grounds\nfor most of the private investment slowdown that the economy is witnessing\nright now. A credible finance ministry is important so that the markets don\u2019t\nget unnerved on surprises from the FM as had happened when GST was rolled out\nas a surprise, or when the largely rural and informal sectors went into shatters\nafter high value currency\nnotes were demonetized overnight. Moreover, political environment uncertainty\nin India is too heightened at the moment to be ignored. <\/p>\n\n\n\n
Secondly, the fiscal consolidation needs to talk about the path to consolidation too. The Indian phenomenon at the centre has been of increasing revenue deficits and attempts at reducing fiscal deficits have been made by curtailing capital expenditure. The centre therefore needs to focus on revenue mobilization and scaling up capital expenditures so that it makes way for \u2018crowding in\u2019 of private investment. <\/p>\n\n\n\n
While the finance ministry tries to address the slowdown by spending beyond what their pockets allow, it must not forget to ensure that the numbers are credible over the medium term. Moreover, it\u2019s time we discuss about the credibility of finance ministry as much as we bat for a credible central bank. <\/p>\n","protected":false},"excerpt":{"rendered":"
While the finance ministry tries to address the slowdown by spending beyond what their pockets allow, it must not forget to ensure that the numbers are credible over the medium term. Moreover, it\u2019s time we discuss about the credibility of finance ministry as much as we bat for a credible central bank.<\/p>\n","protected":false},"author":37,"featured_media":58361,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","footnotes":""},"categories":[3,48],"tags":[251,196],"class_list":["post-74984","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-indian-economy","category-public-finance","tag-finance-ministry","tag-fiscal-policy"],"yoast_head":"\n