The fiasco in making of the fiscal and monetary rules amidst a crisis

The spread of Covid-19 pandemic in India calls for desperate measures in this desperate time. It has been an unprecedented situation having a wider economic impact and created an altogether ‘new divide’. This pandemic situation has also resulted in inevitable COVID poverty throwing millions of people below the poverty line. The UNDP estimate shows that 19.3% of people in India are susceptible to multidimensional poverty due to the pandemic and lockdowns. 

Covid-19 relief measures deployed by the government have been successful in controlling the extremes like hunger and starvation with Garib Kalyan package considerably. But the blue-collar, salaried class at the lower side of the income pyramid has not been helped much. In addition to that technological sophistication and the culture of ‘work from home’ has disrupted the job market and work profile of many. It clearly demonstrates the digital divide that reflects the inequality in the form of unequal access to work opportunities and the loss of income for millions of people. 

Macro policies have been playing the role to the best of the capacities of RBI and Finance Ministry at the moment but the situation demands some more measures directed towards controlling the spread of economic adversities. Loan moratorium, liquidity infusion, relaxation on interest payments, easing out reserve requirements, transfer of surplus to the government for strengthening fiscal measures, providing access to loan restructuring facility are some of the monetary measures adopted by RBI to ease out the economic operations in last six months. 

The RBI has transferred Rs. 57128 cr. surplus to Government very recently. Expansionary measures of RBI have infused liquidity of Rs. 10 lakh cr. in the market. Such expansionary measures are theoretically justifiable and they have immense practical value. There has been an uptick in demand for certain goods and services due to these measures in recent time. However, the annual report of the RBI published on 25^th August 2020 comments on the gloomy consumer sentiments towards the demand for the goods and services. The upward movement in demand is limited to a few essential items. Households and businesses are trying to avoid the majority of their expenses due to various reasons pertaining to restrictions during lockdowns, loss of purchasing power and so on. 

Therefore, the expected rise in demand seems to be difficult in the near future. The annual report of RBI also throws light on the wage and income inequalities that are fueling the situation and making it difficult for the vulnerable to meet the ends. RBI measures are on track as far as the demand side theoretical framework is concerned. Unfortunately, there seems to be ‘consumption pessimism’ among the people as the response to these measures is poor. It is also said that it is the end of the rate-cut cycle for RBI in view of the concerns like excess of money supply and demand-pull inflation.

On the other hand, it is, in fact, creditable that fiscal measures are focusing on supply-side factors as expected. Majority of fiscal tools applied recently like, tax concessions, economic relief package, permission for additional borrowings to state governments are some of the welcoming steps taken up by the government to revive the economy. The question, however, is about the size and impact of these measures. As argued by many experts, there has been an unnecessary focus on supply chain management on the part of the government with little concern to demand-side and the size of relief package is absolutely insufficient to address the problem effectively. The real challenge at this time is to revive the aggregate demand in ‘Keynesian’ sense. Household and business sector are sceptical and unwilling to spend. Therefore, the onus is on the government now to boost the demand in the economy. 

The RBI expects Government consumption to be ‘pandemic-proof’ for the revival of demand. It is important to note here that the government is already operating at 83% of the fiscal deficit target of the whole financial year. The recent statement of the Finance Minister Nirmala Sitharaman about the ‘Act of God in terms of Covid-19’ says a lot about government’s inability and short of fiscal space to spend more money for the economic revival. Declining GST collection is the core concern for the Government at this time along with maintaining the interest rate stability as the state governments are allowed to borrow through open market operations. 

Running a high fiscal deficit will be harmful to the economy as it will worsen the situation by accelerating the price inflation. The collapse of urban demand could not be revived by merely improving the supply chain of essential goods. Assuring safety at public places, uplifting lockdowns nationwide and restoring public confidence will be the key factors to go back to normal life. It will be unwise to think of fiscal deficit and public debt at this time as this abnormal situation calls for proactive government intervention. 

It is obviously a daunting task for the policymakers, viz. RBI and Finance ministry to design a perfect framework but nonetheless it is possible to prioritize the matters in an ordinal manner to determine an effective plan of action. COVID pandemic has thrown the conundrum to the policymakers and it is testing time for the ‘big brother’ too.

_{The author is an assistant professor at the St. Xavier's College, Mumbai.}

_{The views expressed by the author are personal and Indie Journal does not necessarily agree to them.}