Important Articles

Key steps to kick-starting the economy {Indian Economy}

Context
In this article author has discussed the ways to Improve the next financial year in terms of economy
Structural or cyclical
If it is cyclical, the expectation is that there is a chance for upturn soon. If it is purely structural, it will take time until the structural rigidities are removed. Normally, the slowdown is cyclical if it results from a weakening of demand.
Issues
On the structural side while the reform agenda has been carried forward, there are segments such as agricultural marketing, land and labour markets which are still waiting for reforms.
Channels of demand
When we address the issue of demand, we need to look at the four-five expenditure categories of national income accounts: 

  • Private final consumption expenditure
  • Government final consumption expenditure
  • Gross fixed capital formation private and public.
  • Exports
Solution
  • The three autonomous elements that can be used as levers to raise demand are government consumption expenditure, government investment and exports.
  • Private investment can be treated as autonomous only to a limited extent.
  • However, private foreign investment can be an independent factor which can be leveraged.
  • Exports can help to stimulate the economy since exports are influenced by the state of the economy in the rest of the world.
Monetary policy
  • Monetary policy has done its role by reducing the Repo rate by 135 percentage points since February 2019 to date. Banks have not followed suit fully due to the high level of non-performing assets.
  • While the Reserve Bank of India (RBI) can play a supportive role in expanding liquidity, we must understand the limitations.
  • Monetary policy generally is more effective in controlling inflation than stimulating an economy.
  • In the present context of the banking situation, the RBI’s role that is even more important than pure monetary policy will be to quicken the resolution process of bad loans and help banks to move to a healthier situation.
Fiscal policy
  • The counter-cyclical fiscal policy is also running into problems. Given the revenue trend, the Central Government may not find it easy to increase its capital expenditures relative to GDP.
  • In this context, one critical question that is under debate is whether the present situation warrants a breach in fiscal deficit norms.
  • A focused increase in capital expenditures of the Government and the Central public sector undertakings (PSUs) may help to apply the brakes on the slowdown. It might also help to “crowd in” private investment.
  • Reform of the Goods and Services Tax (GST) is very much needed.
Banking situation
The present economic situation, in a sense, has become more complicated because of the poor health of the financial system. An excessive expansion of credit in the earlier years combined with the slowdown have contributed to a rise in non-performing loans in the banking system.
Solution
Quickening of the resolution process along with the recapitalisation of public sector banks has to take priority. The cleansing of the financial system which also includes finding solutions to the problems of non-banking financial companies will help to push the economy up.


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