Need expansionary fiscal policy: NCAER To help the economy recover from the unprecedented disruptions for two consecutive years

It awaits the Indian economy to grow 11.5% in the June quarter and in the range of 8.4-10.1% in FY22. The National Council of Applied Economic Research (NCAER) said. Further calling for an expansionary fiscal policy to put the economy on a sustainable growth path.

“High-frequency indicators show a sharp decrease economic activity during April and May, the peak of the second Covid–19 wave. There are some indicators of recovery in June as unlocking proceeds. This, combined with expansionary macroeconomic policies, could help accelerate growth recovery,” the New Delhi-based think tank said. “Unfortunately, an inexplicably contractionary fiscal policy” in FY21, sharply reducing the deficit, will delay recovery. “An accommodating expansionary monetary policy has also become challenging because of rising inflationary pressures, but growth recovery is still the priority for Reserve Bank of India (RBI).”

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Real reason behind helping in recovery

NCAER helped the economy recover from the unprecedented disruptions for two consecutive years. They said the growth procedure now needs a strong expansionary macroeconomic policy push. “The required fiscal policy stance in this context is the high expenditure growth. Large shortage financing will be required for a second year. Revenues may fall short of expectations because of the depressed level of economic activity.

Planned expenditure in FY22 at 16.3% of GDP is still crucially less than 17.8% in FY21, NCAER said. Even after factoring in the post-budget increase in allocations for larger procurement of vaccines. Yet after the extension of the additional food subsidy programme till November.

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“This unfortunate premature fiscal compression will further extend the period of disruption before the economy can return to normal growth. The fiscal deficit is being reduced sharply from 9.2% of GDP in FY21 to 7.2% in FY22. This premature fiscal compression is quite inexplicable since there is little risk of an elevated level of sovereign debt. It is mostly domestic anyway, becoming unsustainable. ,” the think tank said.

NCAER said notwithstanding the recent rush in both retail and wholesale inflation. The headline inflation is awaited to retreat inside RBI’s band in June. Also continued to moderate till August but will register a rebound after that.

“The initial moderation will be due to a moderation in crude oil inflation from 178% in April 2021 to 119% in May 2021. However, the headline inflation may start rising again on account of a few upward risks on inflation. These are (i) rise in agricultural wages with the onset of kharif activities, (ii) a further rise in crude oil inflation (iii) sticky core inflation near the upper level of the band,” it added.

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