Economics Demystified

With current CPI inflation target of 4% due for review in March 2021, there is a growing clamour to scrap the current “Flexible Inflation Targeting (FIT)” regime. Nonetheless, instead of a sole mandate of retail Inflation as nominal anchor of monetary policy, some dual mandate seems worth considering, where along with CPI headline Inflation, some other anchors such as core inflation, nominal GDP or employment can be included. Going forward, strong monetary policy transmission, institutional capacity to forecast inflation using sophisticated econometric models and independent monetary policy without fiscal dominance are perquisites for an effective FIT regime. Inflation hurts everyone in the country from households to firms. Even moderately high inflation is bad for economy as a whole; it erodes savings and brings uncertainty to the growth and investment climate. Keeping this in mind, Inflation targeting was adopted as the primary objective of monetary policy in 2015-16 to ensure low ...

With GDP numbers plunging on one hand and equity markets soaring to new heights on the other, fears are developing over a K-shaped recovery that favours wealthy, with upper fork of letter “K” being the stock market and lower fork is the real economy, and the two being clearly divorced from each other. However, a well-directed financial stimulus can go a long way to change the alphabet of recovery from “K” to “V”. Indian economy is on the verge of the worst economic collapse since the lockdown was announced in late March. More than 75 lakh Indians have caught infection with hundreds of them dying every day. On economic front, GDP numbers are contracting, business activity and corporate profits has been severely squeezed with private consumption and investment still in doldrums. Yet stocks market remains bullish and keeps on climbing up. It seems as equity market is clearly disconnected from the real economy. It was in the month of March when Indian stock market plunged and touched n...

Centre’s decision to invoke “Force Majeure” clause for non-payment of State’s due GST compensation for FY 2020-21 is morally unacceptable. The two borrowing options that places the onus of extra borrowing on states to compensate for the revenue shortfalls is not only unconstitutional under 101st constitutional amendment Act, 2016 but also a clear blow to the India’s federal structure in future, going ahead. The experience from the last six months in the way states are handling the pandemic clearly indicates that they are truly “ laboratories of democracy ” as paraphrased by former U.S. Supreme Court Justice Louis Brandeis.   However, the constitutionally defined federalism in India is “quasi federal” in nature with existence of strong unitary bias and asymmetry in the way it works. Be its recent revoking of Article 370 by division of Jammu and Kashmir into two Union Territories without securing State government’s consent or recent passage of the three controversial bills on agric...

As pandemic devastates lives and livelihoods, India is heading towards a disastrous “stagflationary” phase. However, bringing in some key structural reforms remains a silver lining in this unprecedented times, going ahead. India has confirmed   38 lakh COVID-19 cases so far with more than 80000 infections reported daily, making it the world’s third-worst-hit country after US and Brazil. While government deserves an applaud for achieving a low mortality rate of less than 2%, but, in its effort to control rapidly rising infections is imposing fresh lockdowns with some states even observing night curfews and weekend lockdowns.   Hence, as an aftermath of lockdowns and new social distancing norms, economy is gradually getting pushed into state of stagnating growth and accelerating prices, formally known as stagflation. Although, high inflation is seldom accompanied by a period of low growth as typically, a slowing economy would reduce the demand for goods and services, thereby d...

Government’s policy of MSP led procurement may not prove to be a sustainable solution to the growing woes of the agricultural sector. In view of strengthening of JAM trinity, along with direct cash transfers, other alternatives like Price Deficiency payments (PDP) can prove to be more effective in ameliorating farming distress. However, its success will largely depend on how well the states implement the reforms related to recently passed ordinances on APMC mandis, contract farming and Essential Commodities Act. Agriculture in India accounts for about 50% of the workforce. However, it is the farmer that is always the worst affected section from any economic shock. Be its government announcement of demonetisation in 2016 or latest pandemic outbreak, farmers have truly borne the brunt of such jolts. Further, they continue to suffer from vagaries of nature – heavy monsoon, drought, and pest attack leading to massive “sunk cost”; thereby pushing them with no alternative means to survive ...

Amid slowing demand, Government’s recent announcement of loan moratorium, collateral free loans and other infusing liquidity measures are not enough to help small businesses to navigate through the crisis. Going forward, a multi-pronged approach where a decent blend of fiscal and monetary policies is required with policy interventions made at both centralized and a decentralized levels. The adverse effects of covid-19 pandemic are looming large on the economy, causing damage to both lives and livelihoods. Among many areas, MSME sector has been bruised badly in the aftermath of lockdown. The sector was already weakened by twin shocks of demonetisation brought in Nov 2016 and cumbersome GST tax structure introduced in July 2017. The pandemic has further added to their woes which are struggling hard to stay in the business with many on the verge of getting bankrupt. MSMEs are backbone of the Indian economy. There are around 63 million MSMEs engaged in businesses ranging from manufactu...

RBI’s latest announcement on fifth round of Operation twist to “flatten” the yield curve may ensure better monetary transmission; however, on the flip side it may actually hurt corporate investor’s sentiment. The Central banks across the world have a long history of experimenting with unconventional monetary policy tools and strategies for liquidity and interest rate management in the economy. One such example is of “Operation twist” which was first exercised by US Federal Reserve way back in 1961 and later in 2011 where it twisted its steep yield curve using clever money market operations. Taking a leaf out of Federal Reserve’s book, RBI introduced its own Indian version of this quantitative easing programme in late 2019 as conventional tools of policy rate reduction seemed ineffective. Operation twist (simultaneous buying of long term securities and selling short term securities under Open market operation) was first introduced on 23 December 2019, with the objective of correctin...

In view of increasing costs of managing pandemic, the fiscal slippages are imminent. However, the resultant sovereign rating downgrades can act a deterrent for the government to announce much required big stimulus-cum-relief packages. Is monetisation of deficit is the way forward? In a recent interview, the chief economic adviser (CEA) to the finance ministry, Krishnamurthy Subramanian defended Indian government on its limited and inadequate covid-19 related fiscal stimulus package; citing concerns over ratings downgrades in case of high fiscal deficits. Earlier in April, Fitch Ratings had said that Indian government has less fiscal room to support the economy than many of its peers and the country’s credit profile would weaken if a wider fiscal deficit increases the debt-GDP ratio. This raises an important question that whether Indian government is in position to disburse much required big stimulus package that can tide over growing woes of economy amid fears of resultant downgrades...

In these extraordinary times of pandemic, given the return of migrants to their villages in large numbers, the dependence on MGNREGA as a major source of employment is expected to increase manifold. However, MGNREGA to successfully prove as an instrument to reduce rural distress, some changes will have to be made in its design and implementation. For the last one month newspapers are filled with some kind of mishaps happening with migrants labourers with their condition getting worse with every passing day. Be it’s the news of killing of 15 migrants by a train run in Maharashtra or killing of 25 migrants workers in a truck collision in Uttar Pradesh; these incidents clearly indicate towards their growing misery. These workers are desperate to leave their present workplace and are walking back to their native places barefooted with no food and public transport operating. Although the state governments are making arrangements for their safe return to their native places by arrang...