November 04, 2020

Fiscal policy must play a bigger role to keep our economy going

Niranjan Rajadhyaksha discusses the balance and coordination between fiscal policy and monetary policy needed to keep the economy going in his weekly column for LiveMint.


Excerpts below:


"India is still one of the rare economies where price pressures have increased since the pandemic began, though they should ease next year. Real interest rates continue to be negative. In September, the yield on the benchmark 10-year government bond was 1.4 percentage points below inflation in India. This is similar to the situation in many large advanced economies such as the US, UK, Japan, France and Spain. On the other hand, most large emerging markets have positive real interest rates—China, Russia, South Korea, Indonesia, Mexico, Taiwan, Thailand and the Philippines.


The balance between fiscal policy and monetary policy—as well as the coordination between the two—is a tricky issue. Much depends on the situation. Here is a general point. Most of the theoretical insights as well as policy attitudes on monetary policy were developed in response to an inflation crisis in advanced economies in the 1970s. For example, average US inflation between 1971 and 1980 was 7.86%, including three years of double-digit growth in consumer prices. The average inflation rate in the past 10 years has been 1.76%."


Read the full article here.




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