Background
Fiscal deficit is likely to miss the target, The advance GDP estimate for FY20 points to the slowest economic growth in nearly 11 years at 5%
Both cyclical and structural forces at work to bring this scenario
Some reasons
Credit market issues that broke out in 2018 have negatively impacted the availability and cost of credit.
Consumption growth has moderated, and investment growth is subdued
Headline inflation has climbed due to the spike in food prices, but this is likely transient, and inflation should stay moderate as the economy is running well below potential
Response and Strategies for Fiscal deficit’s the target being missed
The response to a slowdown is counter-cyclical policies.
- Monetary policy guidance
- The monetary policy rate cut by 135 basis points in 2019 is yet to be passed to the consumers
- The monetary policy works with a lag and given that the banking system is flush with liquidity, this should gradually transmit through the system
- There is also a trust deficit in credit markets and regulators should consider the equivalent of an asset quality review (AQR) as was done for banks in 2015 to restore confidence.
- Fiscal policy guidance
- Fiscal deficit is likely to miss the target, Tax revenues are running well below the target as growth is weak
- Fiscal deficit is likely to miss the target and the attempts to bring it within control by reducing expenditure will only further dampen growth
- The delay in settling dues at year-end to manage the fiscal deficit does more harm than good to the economy
Fiscal policy should also adopt an accommodative approach to tame slowdown. - Economic growth is an essential element of India’s macroeconomic stability and growth is arguably the only way to address many of our problems
