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A Faulty Response to the COVID-19-induced Crisis
India’s response to the COVID-19-induced economic crisis is proving to be ineffective. The neo-liberal embrace of monetary measures that infuse cheap liquidity as a substitute for fiscal activism has not resulted in faster credit growth. The reliance on banks and credit to mediate the stimulus, rather than directly injecting demand through government spending, is not working. Agents overwhelmed by a demand recession are not seen by banks as creditworthy borrowers, and the former in turn are reticent to borrow, fearing that they will not be able to service the debt.
At its August 2020 meeting, the Reserve Bank of India’s (RBI) Monetary Policy Committee kept rates unchanged and refrained from adding to the large-scale liquidity infusion resorted to in the recent past. That could be a signal. The use of monetary policy to support a recovery from the pre-COVID-19 recession and post-COVID-19 economic contraction seems to have run its course. This is possibly not just because of the threat of inflation, which runs at a rate above the RBI’s targeted ceiling of 6%. It could also be a declaration that enough has been done on the monetary policy front over the last few months. Since the crisis is not over, the corollary is that the finance ministry must take over the heavy lifting with fiscal expansion.
That view was implicitly advanced by the RBI governor, in an interview to the Financial Times, when he predicted that “the government will announce more growth-supporting measures.” There was, however, no clarity on how strong those measure would be since, in his view, the fiscal expansion “will be very calibrated and very prudent in its approach” (Parkin and Kazmin 2020).
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