Fiscal problems, Monetary solutions: Can it work?

By Dr. Gagan Deep Sharma

India as a political economy, has been on a roller-coaster ride over the last three years or so. A lot of hype (of reforms push) got created around the time the new government assumed office in India. Macroeconomy as well as stock markets obliged in the first two years or so by producing optimistic numbers. 

Demonitization approached India like a real path-breaker for the political economy of India. The expected outcomes from demonitization (flowing out of the govt's discourses) kept on changing - from unearthing black money to curtailing terrorism to controlling corruption. Eventually, it could be worked out that the most evident intent was to convert the informal economy into a formal economy. Whether this was successful still remains a question but nevertheless, it threw Indian economy a challenge of sorts that has not been addressed in a desired way.

The next big thing - GST - was waiting in the wings and didn't have to wait too long before arriving. With slabs touching as high as 28% and procedural bottlenecks rolling the roost, GST (in its current shape) gave another blow to the economy (particularly the informal economy). General prices in the country have risen sharply since the introduction of GST (in July 2017). Applying GST on oil commodities could have helped ease the pressure from general price level but could have hit the exchequer's revenues badly; causing the government to keep oil commodities out of the purview of GST.

Demonitization and GST, which witnessed to be the epicentres of political mudslinging so far, are now getting reflected in the overall economic picture of the country. Heavy selling by FIIs in September (On 28th September, FII selling touched a whopping 5000 crore Rupees), falling rupee, low GDP growth, rising inflation, etc, have become a cause of concern. These problems are macroeconomic and fiscal, nevertheless.

As a matter of solving these bigger problems, the government seems to be building pressure on Reserve Bank of India to offer monetary solutions including softening the interest rates further. As an alternative, various measures could be considered - GST slabs can be revisited, cesses may be done away with, infrastructural expenditure can be increased, etc. 

In my opinion, trying to increase the money supply in the economy cannot help solve the problems that are fiscal in nature. I am sure you have got some interesting inputs in this regard. Let's deliberate on it further.