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31/03/2020 - Indian Economy

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March 31, 2020

With limited fiscal space and India’s financial distress, the onus for economic revival rests with the RBI. Do you agree with this view? Analyse  (200 Words)

Refer - Business Line

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IAS Parliament 4 years

KEY POINTS

·         Covid-19 has dealt with the global economy badly, the World Economic Outlook, the International Monetary Fund (IMF) downgraded India’s growth estimates for 2019 to 4.8 per cent the lowest for over a decade and sharply revised its 2020 growth forecast to 5.8 per cent, down 1.2 percentage points from the previous forecasts.

Macroeconomic policy

·         Although an appropriate fiscal response is imperative to uplift the economy and especially assist the most vulnerable, a massive fiscal expansion of the type envisaged by many other countries is likely to exceed the fiscal targets set by the FRBM (the reprieve provided by low oil prices notwithstanding).

·         This would imply that the government has to either invoke the escape clause or ignore the rule temporarily with the hope of returning to a path of fiscal consolidation once the Covid-19 storm has been weathered.

·         The Central bank has also taken some steps to ease the dollar credit crunch via long-term repo operations (LTRO) and offered a $2-billion swap for six months to ease the pressure on the rupee, although it has not been part of the coordinated action by central banks in taking even more aggressive measures to counter the heightened volatility and adverse economic fallout from the coronavirus.

·         Even if the RBI rolls out more aggressive measures, the broader concern that still remains is the inadequate monetary policy transmission that limits the effectiveness of any monetary stimulus in India, especially in the context of an impaired financial sector.

·         One can only hope that the acute economic challenges already faced by the country, which will only be exacerbated by the Covid-19 pandemic.

 

 

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