A well balanced combination of lower interest rates, fiscal expansion and a cheaper rupee could help recover India’s economy. Analyse (200 Words)
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IAS Parliament 5 years
KEY POINTS
The most startling fact about the Indian economy over the past few quarters is the collapse in nominal economic growth to its lowest level in two decades.
The latest quarterly nominal growth rate is lower than the incremental cost of government borrowing, a flashing amber light for a country such as India that also has a primary government deficit.
Interest rate reduction
· The Reserve Bank of India’s (RBI’s) monetary policy committee should sharply reduce its assumption of the equilibrium real rate of interest in the economy, and thus move towards a zero real policy rate in the coming months, though a minor uptick in headline inflation is expected.
· RBI had helped bring down the yield on the benchmark government bond from 12.2% in November 1998 to 5.1% in December 2003, during a similar period of weak domestic demand.
· Among other things, this measure helped the government reduce its cost of borrowing and also provided banks with a buffer as the value of their bond portfolios went up.
Role of fiscal policy
· The example of the 2009 stimulus shows that the failure to pull back in time can lead to balance of payments problems down the line, so using fiscal policy aggressively is not without its risks.
· Also, bond yields will jump unless the government can credibly signal that its fiscal expansion is merely a temporary response rather than a new trajectory.
· The total government borrowing is already soaking up most of the domestic financial savings of households.
Exchange rate
· A lower exchange rate can help reflate the economy too, but will also impose costs on firms that have large unhedged dollar borrowings.
· The coordinated use of monetary, fiscal and exchange rate levers will thus be a nuanced act.
Vendhan 5 years
Tn ku
IAS Parliament 5 years
Mental models are not needed. Try to focus more on exchange rate, lower interest rate. Keep Writing.
Tapasvi 5 years
Kindly review
IAS Parliament 5 years
Good answer. Keep Writing.
Shivangi 5 years
Please review. Thank you.
IAS Parliament 5 years
Good attempt. Try to focus more on solution part. Keep Writing.
DHARU 5 years
Kindly review!!
IAS Parliament 5 years
Good attempt. Keep Writing.
