‘Intervention, rethinking needed to stir demand’:

‘Intervention, rethinking needed to stir demand’:

Context

• The current economic scenario of slow growth and decreasing exports suggests measures to be taken by the government to push investments and demand in the economy.

What is the Current economic scenario?

• Subdued growth
• Slowdown in exports
• Slowdown in job creation
• Slow Global recovery
• All this call for government intervention

What are the suggested measures?

• Increased capital spending by centre as well as states on infrastructure.
• Fiscal consolidation target may be relaxed for a year.
• This has a multiplier effect on economic growth as higher spending on projects creates jobs which further create greater demand for goods and services in the economy.
• Implementation bottlenecks need to be addressed.
• Government could issue special bonds for large infrastructure spends.
• The recent PPP option announced for low cost housing is innovative as it targets issues in risk allocation.
• Similar models can be offered to other infrastructure sectors.
• Clauses on renegotiation and grievance redressal need to be included in such policies.
• The government should recapitalise banks by raising capital without putting pressure on the balance sheet by trimming its large holdings in these banks.
• The government has also been concerned about a slowdown in job creation.
• While growth revival through public spending will itself create jobs especially in the construction sector, it is also necessary to focus on the labour-intensive sectors.
• It is time to recast labour laws and allow fixed term employment contracts ensuring more flexibility.
• The government’s recent initiative on setting minimum wages is a move in the opposite direction and should be reconsidered.
• The government needs to resolve issues related to GST especially for the small and medium sector.
• Problems faced by exporters such as withdrawal of duty drawback benefit need to be addressed immediately.
• There is a need to catalyse FDI in organized food retail which can create a supply chain transformation and strengthen the linkages between farmers and markets.

How can RBI’s supporting role help?

• It needs to place some priority on growth while deciding on monetary policy.
• The monetary policy committee seems to be ignoring the weak growth trends while setting interest rates.
• The policy repo rate of 6% does seem excessively high for an economy that is facing recessionary pressure.
• The RBI could outline a plan of cutting interest rates over a period of time.
• The exporters should have access to easily available credit.
• This can be done by expanding interest rate subvention from the current rate to 4% and allowing commercial banks to lend more to SME exporters or tweaking working capital norms.