Context

Macroeconomic uncertainties are mounting.

Impact of US Fed’s decision

• Against the backdrop of possible interest rate hikes by the U.S. Federal Reserve and the taper tantrum, there is pressure on the Reserve Bank of India (RBI) to increase its interest rates to prevent capital outflows.
• The monetary policy corridor is still “accommodative” to support the growth recovery.
• Globally, central banks have started increasing the interest rates.

Macroeconomic uncertainties

1] Inflationary pressure

•  In India, the wholesale price index (WPI) inflation rose to a record high of 14.32% in November 2021 as per the data released by the Ministry of Commerce and Industry.
• The consumer price index (CPI) inflation now is 5.03%, though that is still within the comfort zone of the inflation targeting framework envisaged in India’s new monetary framework.
• The official nominal inflation anchor in India is 4%, with a band of variations of +/- 2. 

2] Absorbing excess liquidity

• The RBI Financial Stability Report, published on December 29, 2021, revealed a possible worsening of the gross non-performing asset (GNPA) ratio of scheduled commercial banks — from 6.9% in September 2021 to 9.5% by September 2022.
• Absorbing the excess liquidity that was injected to stimulate growth as part of the pandemic response is crucial to reversing trends in non performing assets (NPAs).
• Absorption of excess liquidity was attempted by increasing the cut-off yield rate of variable rate reverse repo (VRRR) to 3.99%, and curtailing the government securities acquisition programme.

3] Interest rate structure and implications for government borrowing

•  The call money market rates are below the repo rate.
• The bond yields are increasing ahead of the Union Budget 2022-23.
• The rise in bond yields will result in higher borrowing costs for the Government.

Way forward for fiscal policy

• Maintain accommodative policy stance: Given these macroeconomic uncertainties, maintaining an accommodative fiscal policy stance in the upcoming Union Budget for FY23 is crucial for a sustainable recovery.
• Don’t focus on fiscal consolidation: Any attempt at fiscal consolidation at this juncture employing capital expenditure compression rather than a tax buoyancy path can adversely affect economic growth. 
•  Public investment — infrastructure investment in particular — is a major growth driver through “crowding-in” of private corporate investment.
• Strengthening investments in the health-care sector is crucial at this juncture as a prolonged lockdown can accentuate the current humanitarian crisis and deepen economic disruptions.
• When credit-linked economic stimulus has an uneven impact on growth recovery, the significance of fiscal dominance cannot be undermined.
• Address unemployment: Rising unemployment needs to be addressed through an urgent policy response that strengthens job guarantee programmes.

Conclusion

The upcoming Union Budget for 2022-23 should maintain an accommodative fiscal stance in order to support the sustainability of the economic growth process and also for financing human development.

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