Strong fiscal measures needed

Reserve Bank of India (RBI) Governor Shaktikanta Das has made the first official acknowledgement from a high authority of an expected contraction of the GDP this financial year. Though predictions have been made of varying percentages of shrinkage of the GDP and even of zero growth, it is the first time that a negative growth has been forecast. The RBI governor did not give an estimate of it but noted that there is growing uncertainty in the economy and "an encircling gloom’’. He saw a likely rise of 3.7% in agricultural production as the only bright prospect. That is why the central bank’s focus has now shifted to boosting growth rather than containing inflation, which is one of its mandated tasks. Its monetary policy committee (MPC) held an unscheduled meeting on May 22 and decided to lower the policy rate by 40 basis points to 4%. 

The MPC has cut the rates by 115 basis points in the last two months, and has hinted at further reductions, if necessary. It is a sign of its conviction that inflation is not a challenge now, and the need is to bolster growth. But the question is whether persistent monetary easing on its own would help in that. The flow of credit has not picked up with the rate reductions, partly because the demand for it is low, and even when there is demand banks are reluctant to lend. It is those who are in the most stressed parts of the economy and those who do not have a high rating that need credit, and they do not get it. The credit guarantee offered by the government has not had much impact till now, and the RBI has again sought to further ease the flow. The MPC has said that it is ready to ease liquidity for as long necessary to revive economic growth. 

The RBI also decided to extend a moratorium on payment of instalments of term loans by another three months to the end of August, and this will give more relief to many borrowers. The deferment of payment of interest on working capital loans will help some companies. There were also measures to help state governments and exporters and importers.  But the package of monetary measures that the RBI has unveiled in instalments and may announce in future may be limited by its nature. Issues of growth cannot be addressed by monetary policy changes alone. Strong fiscal measures are needed which only the government will be able to provide.