Higher inflation to reverse the easy monetary policy

In the past two years, the monetary policy has done most of the heavy lifting by keeping surplus liquidity in the system and low-interest rates to support the growth. It is now time for the fiscal policy to take the burden off from the RBI as the central bank has to address the inflation issue and plan an exit from the easy monetary policy. What more can be done on the fiscal side as the Union budget clearly lays down the fiscal measures for 2021-22? There are also fiscal constraints. The government has set a new 5-year fiscal consolidation path to 4.5 per cent fiscal deficit of GDP by 2025-26. The public debt to GDP which includes both center and state govt debt is 90 per cent of the GDP. The additional fiscal stimulus, if any, has to be very focused because of the resource constraints. First, the govt should do whatever it takes -- to vaccinate all and also faster. There is a big demand to increase the direct income support for the poor, which are the hardest hit by local lockdowns. The government guarantee to banks is another area where the banking system could be used to provide funds to sectors worst affected by the lockdowns. Clearly, the burden of supporting the economic recovery is gradually shifting to fiscal policy as the monetary policy globally is taking a reversal with central banks preparing for hiking rates and withdrawing the surplus liquidity.

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