RBI monetary policy to strengthening Economic Sector

by June 7, 2019 0 comments

Strengthening Economic Sector

Modi swept for a second term despite a sputtering economy. But fixing it is not as easy as a rate cut or high-powered panels

As the Reserve Bank of India’s (RBI) Monetary Policy Committee decided to cut interest rates by 25 basis points and Prime Minister Narendra Modi constituted two powerful Cabinet Committees led by him and several of his senior-most colleagues to boost investments and jobs, there appears to be a gradual understanding that all is not well on the economic front. But rate cuts and committees cannot make Indians start to spend more. Consumer demand has been muted for the last six months and is expected to remain so until the start of the festive season. Lowering interest rates might have some benefits, but with banks, including Public Sector Banks (PSBs), still reeling from the bad loan crisis and repairing their books even as they have until now refused to pass on the benefits to retail loan consumers, lower rates will benefit few. Banks have been unwilling. In the case of some PSBs, they are unable to lend money, thus putting several companies under severe working capital pressure and unable to raise funds for expansion.

This is something the Government and the RBI will need to resolve going forward. Without more money entering the system, no matter how growth figures are massaged, on-ground reports will not be positive. Prime Minister Narendra Modi has proven that his Government has social sector reforms — healthcare, electricity and gas connections — in mind. But without economic growth, funding these social sector schemes will be impossible. In addition, there is little doubt that there is a severe shortage of jobs in the industry and without economic growth, which will only come through massive infusion of funds into the economy, these sectors cannot thrive. That can happen in multiple ways, but one aspect the Government will have to consider is to mitigate ‘tax terrorism’ that is afflicting the economy. The term ‘mismatch’ has been driving fear into the heart of company owners everywhere. At the same time, payments from the Government have been delayed and the economy is suffering as a result. While infrastructure projects, particularly the bullet train project, remain priorities, the services and manufacturing sector have to be revived as well.

The Government has some very smart economists at the helm, but reviving the Indian economy will take much more than coming up with policies. They need to be implemented, too. Putting money in the hands of the consumers and driving consumer demand higher may need a few tax rate cuts as well. Yes, there is the need to fund social sector schemes, but the past few years have seen the middle class being taxed at very high rates. Fuel taxes, for example, have really hurt consumer spending even though the Modi Government has benefited immensely through a period of low global fuel prices. Much more thought needs to be put into tax rates — both direct and indirect — for income-tax payers and companies as well. Yes, there is a dire need to lift millions of Indians out of abject poverty but it is all about the economy. Narendra Modi has the political capital to make some key decisions on labour laws, on the financial sector and elsewhere that can give the boost that the economy needs.

Writer/Courtesy: Pioneer

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