It’s too risky to revert so slowly to policy as usual
It’s obvious why fiscal and monetary policy both had to shift into rescue mode after covid bared its fangs in 2020 as a threat to the Indian economy
It’s obvious why fiscal and monetary policy both had to shift into rescue mode after covid bared its fangs in 2020 as a threat to the Indian economy. In contrast, the pace at which policymakers must return to post-pandemic normalcy faces an admittedly tough trade-off. Go too fast, and our economic recovery could flag, a fear fanned by last quarter’s weak factory output. Go too slow, and we risk a prolonged period of sub-par growth, a problem that can arise from a slide-back on macro management reforms. Now that fiscal dominance has staged a dramatic comeback for three covid-stricken years, with demand and supply crawling more or less back to past levels, the monetary policy of the Reserve Bank of India (RBI) has no choice but to take its primary cue from the Centre’s deficit plans. Alas, we know rather too little. The finance ministry’s signals suggest that it is aiming for a fiscal gap of 4.5% of GDP by 2025-26, well above the pre-covid target of 3% officially held as optimum. With no new price-softening factors in play, a big-government fisc would force RBI to keep credit tighter than otherwise, given that it was tasked in 2016 with keeping retail inflation at 4% (or 6% at most). This is a target RBI failed this year. Should it fail again, it would deprive this reform of credibility, perhaps even undo the boldest macro move made by the Narendra Modi administration so far. But then, RBI could yet prove its mettle on price stability.
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