Dwindling fiscal situation and cut in repo rate

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  • Louis D. Brandeis

The Narendra Modi government begins its second term by opening up its kitty for the newly- emerging rural farm sector supporters and traders even as the Economic Affairs Department has painted not so rosy a picture. So, Modi’s second innings kicked off on a rather sour note after a government data showed that India’s economy grew at 5.8 per cent in January-March period, its slowest pace in five years. It shows the first innings of the Narendra Modi-led National Democratic Alliance government in poor light. For this fractured economy, Modi has no one to blame but himself. Now that the ruling party has got a second chance, markets are hoping the government will fix what is broken and infuse life into the economy. The slowdown will certainly put pressure on the newly-appointed government’s Finance Minister Nirmala Sitharaman. The domestic economy is facing headwinds, especially on the global front. The need is to strengthen domestic growth impulses. The fiscal situation at the general government level requires careful monitoring. The quickest way to boost economic growth is to get people to spend more. The upcoming Union budget is being looked upon as the platform to do just that.

Prior to that as was expected, the monetary policy committee (MPC) of the Reserve Bank of India delivered its third consecutive rate cut of 25 basis points, citing significant weakness in growth impulses. The repo rate, short form of repurchase rate, now stands at 5.75 per cent, the lowest in the last nine years. Thursday’s reduction in the repo rate underscores the theme: Growth impulses have weakened significantly and a sharp slowdown in investment activity etc. The RBI’s committee has done exactly what the doctor ordered to tackle the prevailing economic situation of the country. The members of the MPC, including Viral Acharya and Chetan Ghate, who had earlier voted against monetary easing, opted not only for this short-cut method, but also a shift in stance from neutral to accommodative, opening the door for more rate cuts in the future. The message is clear: the slowdown in economic activity is deeper than what was believed. On the inflation front, recent data points towards a broad-based pick up in prices of several food items, increasing the prospects of higher retail inflation in the coming months. However, the MPC isn’t perturbed, as it expects a larger reversal in prices during autumn and winter. There is no denying that the economy needs a package, not just a solo act. For growth to revive, it needs a combination of fiscal and monetary measures.

It is clear that the rate cut is aimed at providing some sort of a stimulus to economic activity. Whether or how effective it will be in achieving this objective is a question which cannot be answered right now. It also remains to be seen whether the central bank will continue to cut interest rates in the future. The apex bank has given the necessary signal telling the gravity of the situation, now it is for the finance ministry and the government to act.

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