View: Fiscal stimulus not enough, monetary easing needed to revive growth


After months of suspense on the macroeconomic front, the wait is finally over. Our worst fears have come true. Friday’s data release by the Central Statistical Organisation (CSO) shows the economy in dire straits. GDP growth for the second quarter of 2019-20 has come in at a dismal 4.5%, the slowest in over six years. Worse, if core sector growth in October 2019 (data for which was released the same day) is any indication, growth is nowhere near bottoming out. Add to that fiscal data released by the Controller of Government Accounts also on Friday, and the macroeconomic scenario couldn’t be gloomier.

Rewind to May 31, 2019, when GDP data for the first quarter came in at a 25-quarter low of just 5%. The broad consensus then was that this was as bad as it could possibly get. After all, the last time the Indian economy grew at less than 5% was in January-March 2012-13, during the scam-tainted last months of the UPA government when growth touched 4.3%. We’ve come a long way since then. Or so we thought.

Alas. As evident from the latest data, our macroeconomic troubles are far from over. And, as is often the case, when troubles come, they seldom come singly. Not only has GDP growth for June-September 2019 dipped to a six-year low, the slowdown seems set to continue.


Manufacturing, the sector that’s supposed to provide jobs and is the focus of GoI’s ‘Make in India’ programme, has contracted 1%; core sector growth has contracted 5.8% in October 2019. Growth in non-food credit is lacklustre, even as the fiscal deficit (the excess of government expenditure over revenue) for April-October 2019 has overshot the budget estimate for the entire year.

In a nutshell, the scope for remedial measures is limited. Factor in October inflation at a 16-month high of 4.62% — well over the mid-point of RBI’s target of 4-6% and food inflation at 7.9% — and both fiscal and monetary policy (repo rates have been cut 135 basis points since February 2019) are fast approaching their limit.

It’s no consolation that growth at 4.5% is a tad better than some estimates made in the run-up to the data release (4.2-4.5%). The reality is, it’s a far cry from GoI’s and RBI’s original estimates, and RBI’s successive revisions of growth for the year — from 7.2% in April, to 7% in June, to 6.9 % in August, to 6.1% in October.

Silver Lining
The only silver lining in the gathering storm clouds is the stock market, where the Sensex is on a tear, seemingly heedless of underlying fundamentals. Sure, the surge in global liquidity and retail investors continued fascination with mutual funds provides fuel for markets. In a scenario where global interest rates are ridiculously low, in some cases even negative, it is but natural that some money will find its way into riskier emerging market assets. But that is not good enough. Unlike the primary market, the Sensex does not reflect fresh investment, but only secondary market activity, or money passing from one hand to another.

But all is not lost. The combination of subdued credit offtake and monetary easing has resulted in India’s 10-year benchmark yield falling to a close to-five-year low of 6.5%. Hence anxiety about a spike in government bond yields if the fiscal deficit target is breached can be put on the backburner.

Enthusiasm Remains
Sure, rating agencies will be outraged. They might even lower our rating. Moody’s has already lowered its outlook for India from stable to negative. But that has not dimmed the enthusiasm of foreign institutional investors (FIIs), who after a selloff bout from July to mid-September, have resumed their buying. Net purchases stood at $12.49 billion in the year to early November.

That’s not surprising. With monetary easing being the order of the day, worldwide, global capital is hunting for yields. Money will come. And it will stay invested, provided growth picks up. But that will happen only if the government steps into the breach, reverses the steady decline in capital formation seen during the past many months — capital goods output contracted for the ninth consecutive month in October — by opening up its purse to capital expenditure (read: spending aggressively on infrastructure). This will create jobs, increase consumption and, once the virtuous cycle kicks off, spur private investment and growth.

The 80s rock band Dire Straits seems to have had a better understanding of macroeconomics than our policy wonks. Their 1982 song, ‘Industrial Disease’, which describes when the British economy in the early 1980s was facing a situation similar to ours today, puts it well: “And everyone’s concerned about Industrial Disease/… [that] these are ‘classic symptoms of a monetary squeeze’/On ITV and BBC they talk about the curse/ Philosophy is useless, theology is worse/ History boils over, there’s an economics freeze.”

It would be wrong, however, to call out only RBI. Monetary policy cannot do the heavy lifting alone. Monetary easing can only work in tandem with fiscal easing. Central banks know their policy tool kits are asymmetric — monetary policy is far more effective in dealing with rising inflation than with a growth slowdown. Do governments know likewise?

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