Tuesday, October 16, 2012

The growing financial mess

Indian policymakers have miserably failed to arrest the growing financial mess, feels Manish K. Pandey

Shouldn’t policymakers keep in mind the cost-benefit impact of putting yet another stimulus in place vis-à-vis one more round of rate cut. Moreover, the need of the hour is to vie time for these stimulus pills to run through the system, rather than just shooting yet another bullet without aiming. But considering the mindless deficit spending by the government, where lies the respite for the ailing Indian economy? “Unlike in the OECD countries, where the stimulus strategy will have to be led by fiscal policy; in India, monetary policy will have to lead the revival,” answers Dr. M. Govinda Rao, Director, NIPFP. However, the policymakers seem to have lost on that front too. Albeit in a bid to boost money supply and ease interest rates, the RBI has sharply reduced the overnight lending rate to 5% from 9% since September 2008, apart from cutting down on other key policy rates; but then almost all of them have been untimely. In fact, IMF, too, has criticised RBI’s tendency to adjust interest rates between scheduled policy review meetings.

So, while there is a clear need and justification for fiscal expansion to counter the current downturn, what India really needs is to purse fiscal consolidation. Moreover, public debt needs to be brought down and fiscal discipline needs to be maintained to sustain growth, else the mounting pressure on interest rates will further restrict the availability of private credit and investment. Certainly the policymakers in the forthcoming government have a challenge in terms of striking a balance between financial stability and sustaining the growth momentum. But will they succeed is still a question! All thanks to the forthcoming ‘general’ elections for ‘not-so-general’ promises being made to arrest the fiscal turmoil. But then one shouldn’t forget, the only place where optimism flourishes most is nowhere but a lunatic asylum!


Source : IIPM Editorial, 2012.

For More IIPM Info, Visit below mentioned IIPM articles.
 
IIPM : The B-School with a Human Face
Posted by at
Labels: , , , , , , , , ,