India is 16 months into the Covid-19 pandemic. In this period, we have seen a colossal loss of human lives coupled with a huge contraction in output. The rate of real economic growth measured in terms of GDP at constant market prices (base year 2012) has revived in 2020-21 and entered into a positive territory in Q3 (0.4 per cent) and Q4 (1.6 per cent).

The second wave of Covid turned virulent, pointing to the urgent need to speed-up and scale-up vaccination to save lives and to support the recovery process. The OECD Economic Outlook (May 2021) for India has observed that the chronic underinvestment in public health infrastructure makes the situation calamitous.

The retail headline official inflation, however, measured in terms of consumer price index-combined (CPI-C) was 6.3 per cent in May 2021, thus crossing the upper band of the mandated inflation target of 6 per cent. This was primarily on account of fuel inflation which swelled to double digits (11.6 per cent). The core inflation (headline inflation minus food and fuel), which measures the persistence of inflation, was 6.6 per cent, the highest since May 2014, as per RBI estimates.

Data released by the Centre for Monitoring Indian Economy (CMIE) reveal that in May 2021, the unemployment rate was 11.9 per cent, which is higher than unemployment figures of around 8 per cent in April 2021. The number is also higher than that seen during the period June 2020 through March 2021, which was in the range of 6.5 per cent (for March 2021) and around 10.2 per cent (for June 2020). These are worrying trends.

We have seen unprecedented fiscal and monetary policy stimulus with the intention of reviving the economy. Fiscal stimulus was reflected in massive fiscal deficit and government debt relative to GDP. For instance, general government (Centre plus States) deficit is estimated at around 10.8 per cent of GDP in 2021-22 on the top of 14.3 per cent of GDP recorded in the previous year. As a result, the debt-to-GDP ratio crossed 90 per cent against the mandated level of 60 per cent for the general government. These figures are the highest levels since the institution of the Fiscal Responsibility and Budget Management (FRBM) Act 2003.

At this level of deficit and debt, there is hardly any space available for further fiscal stimulus with counter-cyclical deficit and debt though there has been a persistent clamour from many quarters, particularly from industry captains, for enhanced fiscal sops. If the fiscal policy is pushed further for more stimuli with higher borrowings, it will lead to higher debt levels, resulting in higher interest rates.

Crowding out investment

Higher interest rates will result in crowding-out of private sector investments as interest rates becomes higher for the private sector. Alternatively, if the government takes recourse to money finance by printing money, an option offered by some, the potential inflation threat will loom large.

Already, inflation (both headline and core) as alluded to earlier, has been at a higher level. Any further increase in the inflation rate will be a threat to input cost and will jeopardise recovery.

Given the inadequate fiscal space, the contraction in economic activity due to the pandemic was addressed by front-loading the monetary policy with an accommodative stance and maintaining status quo in the policy repo rate. The monetary accommodation announced by the RBI during the period February 6, 2020 to March 31, 2021, was to the tune of ₹13,61,200 crore or 6.9 per cent GDP.

However, it is pertinent to mention that as per the RBI State of Economy review in the June Bulletin, the liquidity availed of was much lower, at ₹8,91361 crore or 4.5 per cent of GDP. Similarly, the monetary accommodation announced during fiscal 2021-22 so far (up to June 7) aggregated ₹3, 61,000 crore or 1.8 per cent of GDP.

However, the amount availed has been much lower at ₹98,355 crore or 0.5 per cent of GDP. In this context, it is of interest to note that the monetary policy accommodation has not been very encouraging except for net OMO purchases which imply purchasing government securities by the banks from the RBI in the open market. For example, as against the announcement of ₹1,50,000 crore, the net OMO purchase was ₹3,56,265 crore.

The market appetite for most of the unconventional monetary policy instruments such as Long Term Repo Operation (LTRO), Targeted Long Term Repo Operation (TLTRO) and the much acclaimed G-SAP has not been very reassuring. For example, up to June 4, as against the announced amount of ₹2 lakh crore for G-SAP (including regular OMO), the availed amount was only ₹97, 955 crore.

This development, seen in conjunction with the transmission of monetary policy, reveal that the reduction in the weighted average lending rate (WALR) is far lower than the policy repo rate (PRR) reduction. For example, the PRR was reduced by 250 basis points (bps) during the period February 2019 to May 2021 but the corresponding reduction in WALR was only 187 basis points (bps).

Furthermore, the non-food credit offtake has also been slower in the case of most of industries. On the financial year basis so far (April 2021), the growth rate of credit off-take by all industries has been - 0.8 per cent and services -1.5 per cent. Industry-wise break-up of credit off-take revealed that during the same period, infrastructure has been 0 per cent, textiles -0.9 per cent, all engineering 0.2 per cent and construction 2 per cent.

Given the lower availment of monetary accommodation and slower transmission of monetary policy from the reduction of policy repo rate to bank lending rate, coupled with the lack of appetitive for credit off-take, it is important to mention that the monetary stimulus provided by the RBI has not been encouraging.

There is an urgent need for a proactive role by banks and the private corporate sector to be partners in the growth process. In this context, banks should facilitate monetary policy transmission and also credit off-take. Private sector as a partner has a much greater role and responsibility to move the economy to a higher growth trajectory.

The government has already provided a substantial amount aggregating ₹14,40,730 crore under three Atma Nirbhar Bharat Abhiyan schemes announced by the Central government. This amount needs to be channelled and spent efficiently and effectively. Here the private sector has an important role to play.

It is well-recognised that at a global level that the Covid-19 pandemic is a once-in-a-life-time crisis and the global recovery, though nascent, is “no ordinary recovery” (in the words of the OECD). In India, all the stakeholders, the RBI, government, banks and above all the private sector will have to play a proactive role in pushing growth.

In this context, it is appropriate to quote the RBI’s review of the state of the economy, “A virtuous combination of public and private investment can ignite a shift towards investment and thereby a trajectory of sustained growth.” But of course, that is easier said than done.

The writer, a former central banker, is a faculty member at Bhavan’s SPJIMR. Views are personal. Through The Billion Press

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