March 09, 2021

Monetary policy: Should it step back as fiscal measures kick in?

Niranjan Rajadhyaksha writes in Mint that the Indian central bank faces a policy conundrum, and the choices it makes will have profound implications for the economy.

 

Excerpts below: 

"It will soon be a year since India went into a harsh lockdown to control the spread of the covid pandemic. Monetary policy led the tough battle to deal with the economic collapse that followed. Discretionary fiscal policy was more conservative in the early months. Much has changed since then. Fiscal policy is coming into its own to support the Indian economic recovery. Should monetary policy take a back seat? And can it?"

 

"The next fiscal year is likely to be a tricky one for monetary policy managers. Inflation has luckily been trending downwards of late, but the shadow of excess government borrowing is a long one. The 15th Finance Commission estimates that public debt as a proportion of gross domestic product will be around 85% even five years down the line. India has not yet reached a point where monetary policy is being overwhelmed by fiscal policy and the primary tasks of inflation control and financial stability suffer. Yet, coordination between fiscal and monetary policy promises to be one of the most thorny problems in the next few years, in terms of technical as well as political economy issues."

 

You can read the full article here

In : OP-EDS
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