Get cracking another fiscal stimulus is badly needed

Get cracking another fiscal stimulus is badly needed

Reserve Bank of India’s monetary policy committee met this week and chose to leave the policy interest rate unchanged. The highlight was not the committee’s decision to keep its powder dry. It was an independent decision of the central bank to permit banks to restructure loans of firms that are being pummelled by the lockdown and the continuing transmission of the virus. This is an unambiguous signal that we are in the midst of one of the worst economic performances since Independence. RBI has forecast a recession, the first in four decades. It will undermine the long-term viability of even sound firms, thus affecting jobs and growth in the medium future as well.

Indian banking has a decidedly uninspiring record when it comes to special dispensations on recognising stressed loans. The last occasion, initiated after the global financial crisis in 2008, acted as a drag on the economy for years. RBI has promised to avoid earlier mistakes. It has appointed former ICICI bank chief KV Kamath to head a committee that will flesh out the design and later validate some resolution plans of banks. Getting the details right will be everything here. The special resolution package also highlights the primacy of monetary policy and banking system in pulling the economy out of its current morass.

Fiscal policy has thus far played an underwhelming role. Given the nature of the economic challenge, public investment needs to lead the recovery. The recession will, in any case, render the budget’s deficit targets meaningless. The only thing that matters now is reviving growth, it is the only sure-shot way to meet any target. The government shouldn’t wait for milestones such as the introduction of a vaccine to decide on another stimulus package. Indefinite delays will only exacerbate the situation. The finance ministry needs to get cracking.