The Reserve Bank of India (RBI) has handed over a fat cheque of ₹99,122 crore to the government through a record surplus transfer for FY21. This is over 85% higher than the budgeted amount of ₹53,510 crore. With this unexpected gain, New Delhi can now afford to get into the spirit of a second round of economic stimulus.
Calls for the same are rising by the day, and the reasons are aplenty. As the second wave has put most of India under lockdown, signs of distress are becoming visible in various corners. Most high-frequency indicators such as toll collections, e-way bills, power supply and retail and recreation have remained in the negative. Unemployment rate has jumped to double digits. One of the largest gold loan lenders auctioned ₹404 crore worth of gold to recover money from borrowers, indicating Indians are unable to pay back even emergency loans.
All these factors indicate that consumption would be hit hard yet again. As pointed out in this column yesterday, the revival in consumption may not be as swift as it was after the first wave.
Meanwhile, the toll of the pandemic has been severe among the weaker sections of the country. Ergo, it shouldn’t come as a surprise that from nobel laureate Abhijeet Banerjee to Kotak Mahindra Bank chief Uday Kotak, most want the government to step up again on the stimulus. What perhaps differs is the focus of the stimulus. Kotak has advocated increasing both the social spending as well as giving support to sectors most hit from the pandemic. In essence, the government continues to do its damage control for firms and also gives cash to Indians to spend.
But RBI seems to be more in favour of capital expenditure. In its annual report for FY21, the central bank said that the government’s focus on capital expenditure brightens the outlook on the economy. It added that investment-led recovery would boost both consumption and output.
“A mix of policies may be needed, as very low capacity utilization rates may leave little incentive for the private sector to start a strong investment cycle. Therefore, there will be a need for an increase in public investment spending that can crowd in private investment, while private consumption needs to be supported through improvement in consumer credit,” the report said, based on an analysis by the central bank staff.
The upshot is that as India’s growth forecast for FY22 gets chopped by all and sundry, the government will need to step in to arrest further damage. RBI’s large surplus transfer and its willingness to accommodate the borrowing through bond purchases should alleviate the government’s worry over fiscal deficit.
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