Shaktikanta Das said the central bank has been ahead of the curve and acted early with monetary policy easing to address the imminent slowdown in the Indian economy. (File photo: Reuters)
Citing limitations of monetary policy to push growth, Reserve Bank of India (RBI) Governor Shaktikanta Das on Friday said structural reforms and more fiscal measures are needed to revive growth.
Das said the central bank has been ahead of the curve and acted early with monetary policy easing to address the imminent slowdown in the Indian economy.
“We, in the Reserve Bank, therefore, constantly update our assessment of the economy based on incoming data…This approach helped the Reserve Bank to use the policy space opened up by the expected moderation in inflation and act early, recognising the imminent slowdown before it was confirmed by data subsequently,” Das said at conference at St Stephen’s College, New Delhi — his alma mater.
RBI Governor in favour of proactive fiscal policy
Amid growing clamour among economists asking the government to postpone fiscal consolidation to boost growth, the RBI has weighed in to suggest that fiscal policy must be “further activated” to revive consumption and support economic expansion. The RBI Governor’s comments are critical as they come just ahead of the Union Budget to be presented next Saturday on February 1, wherein the Centre is expected to overshoot the fiscal deficit target of 3.3 per cent of GDP in 2019-20.
At its monetary policy review last December, the central bank slashed the GDP growth forecast by 190 basis points to 5 per cent over the last two policy statements in a matter of two months — its sharpest revision in at least a decade. The RBI’s monetary policy committee also kept the repo rate — the rate at which RBI lends to commercial banks — unchanged at 5.15 per cent as inflation risks were expected to rise. To support growth, the RBI has cut its repo rate by a cumulative 135 basis points during February-October 2019. GDP growth in July-September 2019 quarter has hit a six-year low of 4.5 percent, as per the government data.
Das indicated that the RBI may have limited room now and fiscal policy will need to be “further activated” to support faltering growth. The government is widely expected to breach its fiscal deficit target of 3.3 per cent of GDP in the current year, with analysts expecting it to touch 3.7 per cent. Many economists have suggested that the government should delay fiscal consolidation for a couple of years and support the economy through elevated spending.
The RBI governor’s comments are critical as they come just ahead of the Union Budget to be presented next Saturday on February 1. “Monetary policy, however, has its own limits. Structural reforms and fiscal measures may have to be continued and further activated to provide a durable push to demand and boost growth,” Das said. The government is also focusing on infrastructure spending which will augment growth potential of the economy. States should also play an important role by enhancing capital expenditure which has high multiplier effect, he said.
“I have (earlier) highlighted certain potential growth drivers which, through backward and forward linkages, could give significant push to growth. Some of these areas include prioritising food processing industries, tourism, e-commerce, start-ups and efforts to become a part of the global value chain,” Das said in his speech on ‘Seven ages of India’s monetary policy’.
Apart from growth and inflation, the RBI has given due importance to financial stability, he stressed. “Although global experience with financial stability as an added policy objective is still unsettled, the Reserve Bank has always been giving due importance to financial stability since the enactment of the Preamble to the RBI Act...More recently, the focus of financial stability has not only confined to regulation and supervision but also extending the reach of formal financial system to the unbanked and unserved population,” he said.
Admitting that correctly assessing the current economic situation and thus formulating the necessary monetary policy is a challenge now, he said this is why monetary policy around the world is in a state of flux today.
The precise estimation of key parameters such as potential output and output gaps on a real time basis is a challenging task, although they are crucial for the conduct of monetary policy, he said.