Should the government loosen its purse strings?

News: Experts discuss the perceived threats due to inflation and suggests what governments fiscal policy can do to contain inflation

Some analysts believe that the government must limit its spending to prevent price rise from getting out of control. (Retail inflation is close to 6%, the wholesale inflation rate is in double digits).

Other analysts, however, believe that the current rise in prices is a temporary phenomenon, and that the government must ignore the fiscal deficit and increase spending to support the ailing economy.

This article presents the view of various experts (Prashanth Perumal J., N.R. Bhanumurthy and Himanshu) with respect to the above said dilemma.

What are the factors contributing to rising inflation in India?

Factors contributing to Inflation

Supply-side constraints

Domestic factors have added to the problem. for example, taxes on petroleum goods and services

Increase in international oil prices,

Risk of transmission of international inflation to the domestic economy

What are the various views of experts on rising Inflation?

According to experts, retail inflation is not a concern, they believe that the RBI has many instruments to contain the Retail inflation pressure. However, they are concerned about the widening gap between the Wholesale Price Index and retail market prices.

There is a chance that some inflation in wholesale prices will be passed on to consumer prices, and it will be a cause of concern for the overall health of the economy

What is their expectation on governments fiscal policy stance in upcoming Budget?

One, N.R. Bhanumurthy expects that the government will focus on the social sector as well as medium-term growth prospects as it has enough fiscal space. However, he cautions that economic recovery stimulus has to be on a more sustainable basis rather than in the form of short-term spikes.

Two, author Himanshu suggests the government increase spending rather than opting for fiscal prudence that leads to the growth slowdown. Because

-There is excess capacity in the economy

-Aggregate consumption, which is a big part of GDP, is slowing down.

He suggests, the government should increase spending by providing social security schemes and by increasing the transfers to States.

Can the government’s fiscal policy address inflation driven by the supply side?

There’s not much that the government can do. However, the government should try to protect demand, the economy, the middle class, and particularly the poor and vulnerable, from the impact of high inflation. For example, by lowering direct and indirect taxes.

The government should allow people to have a larger disposable income so that consumption in the economy increases.

Source: This post is based on the article “Should the government loosen its purse strings?” published in The Hindu on 21^st Jan 2022.