Monetary policy alone cannot do all the heavy lifting to stimulate growth, says RBI governor
Das appears to be pointing to widespread expectations that the budget will include tax, reform proposals to stinulate growth
Mumbai: In comments that assume significance a week to budget day, Reserve Bank of India governor Shaktikanta Das on Friday said monetary policy alone cannot do all the heavy lifting to stimulate growth—fiscal policy and structural reforms will have to pitch in equally to revive India’s sagging economy.
First, Das appears to be pointing to widespread expectations that finance minister Nirmala Sitharaman’s 1 February budget will include tax and reform proposals to stimulate economic growth.
Second, he may be hinting that the pause in RBI’s interest rate cuts is likely to remain in place. The central bank, which has cut interest rates by a combined 135 basis points in five moves since February last year, kept rates on hold at its last review in December.
The economy is projected to grow at 5% in 2019-20—the slowest in 11 years. “Monetary policy, however, has its own limits. Structural reforms and fiscal measures may have to be continued and further activated to provide a durable push to demand and boost growth," Das said.
Delivering a lecture in Delhi on the ‘Seven Ages of India’s Monetary Policy’, he said monetary policy frameworks in India have “evolved in line with the developments in theory and country practice, the changing nature of the economy and developments in financial markets".
Das said RBI had used the space that was opened up by the moderation in inflation early last year, and started loosening monetary policy after having recognized the imminent slowdown in growth even before it was confirmed by data.
While assessing the current economic situation remains one of the major challenges of the central bank, Das said, the precise estimation of key parameters such as potential output and output gaps on a real time basis has been challenging. “Nonetheless, a view has to be taken on the true nature of the slack in demand- and supply-side shocks to inflation for timely use of counter-cyclical policies."
Das highlighted certain potential growth drivers, which he said could give a significant push to growth. These include prioritizing food processing industries, tourism, e-commerce, startups and becoming part of the global value chain.
Das said the central bank has renewed its focus on financial inclusion and promoting secured, seamless and real-time payments and settlements to increase public confidence in the domestic financial system, besides improving the credibility of monetary policy for price stability, inclusive growth and financial stability.
Sitharaman’s budget next week is expected to contain stimulus measures for small businesses and non-banking financial companies, considering that the cut in corporate tax rates and the rate cuts by the RBI have failed to revive growth.