Viewpoint: Macroeconomic Priorities

07 NOV,2022 | MEDC

The RBI Governor has rightly said that the constant endeavour of the Central Bank is to focus on inflation. That has to remain a key macroeconomic policy priority. Inflation in India continues to be affected by global factors. The Federal Open Market Committee (FOMC) of the US Federal Reserve, as anticipated, raised the policy interest rate for the fourth consecutive time by 75 basis points this week. The US Federal Reserve is raising rates at the fastest pace in nearly four decades, to contain inflation which is considerably above their medium-term target of 2%. The Fed is of the opinion that risking over-tightening of rates is better than under-tightening. The RBI will need to factor this stance into its policy calculations.

RBI is also increasing interest rates to contain domestic inflation, which has been above its comfort zone for the past three consecutive quarters. This is officially regarded as a failure to attain the inflation target. The Monetary Policy Committee (MPC) of RBI has, as legally mandated, drafted a letter to the government explaining the reason for its failure. The government needs to make this letter public, to encourage an informed debate on this important socioeconomic issue. Ongoing tightening by the large Central Banks worldwide, particularly the Fed, would increase complications for RBI. Our Central Bank has conducted policy responsibly so far, and, as the RBI Governor said, inflation control, sustained growth, and financial stability need not be mutually exclusive. Knowing that is reassuring.

Another important focus area has to be the reduction of the fiscal deficit. Due to various socioeconomic schemes recently announced by the government, the fiscal deficit is likely to remain elevated in the medium term. The focus of public policy should be to reduce it at the earliest. In this context, the government will have to resist the temptation to increase non-essential expenditure for populist gains, keeping in mind the forthcoming Lok Sabha elections, before which the budget to be presented in February 2023 will be the last full one.

The government should take the lead in rationalizing tax rates. The current GST system does not promote genuine ease of doing business, partly due to premature rate reduction, which needs to be corrected. This is essential for both the Centre and the states, as it will help create the necessary fiscal space to push growth-enhancing expenditure. Sharing of GST revenue between the Centre and the states also leads to many issues which need to be sorted out in the long-term socioeconomic interest of the nation. On the flip side, the government is confident of meeting the fiscal deficit target for the year despite significantly higher than budgeted expenditure on food and fertilizer subsidy, due to the overall healthy tax collection, boosted primarily by GST.

Amid exceptional global uncertainty, India's macroeconomic policies need to balance short-term priorities with medium-term objectives for sustainable growth and resilience. After providing the economy timely and all-inclusive pandemic support, policy needs to focus on controlling inflation and reducing the fiscal deficit. Along with the continuing post-Covid economic recovery, fiscal consolidation needs to resume to rebuild fiscal space, make room for much-needed public investment, and alleviate risks from high public debt. Structural reforms are the key to unlocking our growth potential, and so they need to be topmost policy priorities.

*Picture Credit: Google


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