Relevance: GS-3: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment; Inclusive growth and issues arising from it; Government Budgeting.

Key phrases: Macroeconomic, WPI, CPI, Headline and Core Inflation, Inflationary pressures, Non-performing assets (NPAs), Labour Force Participation Rate (LFPR)

Context:

• The Union Budget needs to maintain an accommodative fiscal stance to support the sustainability of economic growth

Background:

• Macroeconomic uncertainties are mounting.
• 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.

Headline and Core Inflation:

• The headline inflation simply refers to the inflation in the CPI (or WPI) covering all the categories of goods and services.
• On the other hand, the core inflation excludes the volatile categories such as food and fuel in order to measure the increase in the prices of goods and services.

Monetary policy instance:

• The monetary policy corridor is still “accommodative” to support the growth recovery. Globally, central banks have started increasing the interest rates.
• However, we need to wait for the Monetary Policy Committee meeting in February 2022 to understand the RBI’s decisions regarding policy rates.

Challenges:

• Inflationary pressures: 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.
• Non-performing assets (NPAs) crisis: The RBI Financial Stability Report, 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 under a “severe stress scenario”.
• Interest rates structure: The call money market rates are below the repo rate. The bond yields are increasing. The cut off yield rate of 10-year benchmark bond is as high as 6.63%. The rise in bond yields will result in higher borrowing costs for the Government.
• Fiscal deficit: The fiscal deficit as a percentage of GDP rose to 9.5% in 2021–22. The RBI estimates suggest that revenue deficit pre-empted about 70% of the gross fiscal deficit during the period 2018-19 to 2019-20, and increased further to 79% in 2020-21 and 76% in 2021-22.
• Public health spending: Public spending on health by the Union government is still below 1% of GDP, though the estimate has increased from 0.2% of GDP in 2020–21 to 0.4% of GDP in 2021-22.
• Addressing unemployment: The unemployment rate in India, amidst lockdown and restrictions on mobility, is 12.81% as of June 8th 2021 based on the data provided by the CMIE.
• Gender dimension: Labour Force Participation Rate (LFPR) of females in the productive age (15-59 years) was 26.5 per cent in 2018-19, as compared to 80.3 per cent for males.
• Others: Food security issues, gender specific issues, poverty alleviation to elimination, infrastructure development.

Suggestions:

• Though 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. It has been argued that the inflation we are currently experiencing is transitory in nature due to supply chain disruptions and volatile energy and food prices.
• 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).
• The RBI has not yet formally announced any “normalization” procedure, though 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.
• Bringing down the fiscal deficit now can be detrimental to economic growth recovery.
• The plausible “fiscal risks” arising from the mounting public debt and deficits need to be tackled with a medium-term road map of fiscal consolidation, as instantaneous deficit reduction can affect the sustainable growth recovery process.
• 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.
• Rising unemployment needs to be addressed through an urgent policy response that strengthens job guarantee programmes.
• The welfare models of the Government in providing food security to poor households and designing gender budgeting in energy infrastructure are also welcome.
• However, we need to go further to strengthen social sector policies in the time of a pandemic.

Conclusion:

• When credit-linked economic stimulus has an uneven impact on growth recovery, the significance of fiscal dominance cannot be undermined. 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, which is crucial in the time of a pandemic.

Source: The Hindu

Mains Question:

Q. Discuss how the macroeconomic indicators in Indian economy affect the prospects of the development in the country.