Mix of both fiscal and monetary policy needed to salvage the economy: 18-03-2020

A combination of monetary as well as fiscal policy measures are called for to salvage the economy from the collateral damage from the fallout of the spread of coronavirus disease-COVID-19, according to a research report by the State Bank of India. 

On the monetary side, besides maintaining a proactive liquidity regime as well as facilitating stability in financial markets through unconventional measures, the research report makes a case for a rate cut by the central bank to accommodate the possible surge in liquidity demand and shock-related price increases. 

The RBI may also need to consider a degree of prudential forbearance in specific sectors like hotel, aviation, transport, metal, auto components and textiles, it said. The central bank should make use of the current situation to incentivise digital payments given the risk of using currency notes in times of pandemic. 

The output in the economy is expected to slow down on account of both demand-side and supply side factors. On the demand side, inoperability analysis for three sectors namely Transport, Tourism and Hotels show significant impact on demand and hence output. The SBI research team estimates that the impact of a 5% inoperability shock could be 90 basis point on GDP from Trade, Hotel and Transport and Transport, Storage and Communication segment, that could be spread over FY20 and FY21, with a larger impact in FY21.

On the supply side China is an important source of critical inputs for many sectors. Supply shock is akin to higher price of inputs which in turn affects the price of all the commodities up the supply chain. A simultaneous demand and supply shock to the economy will also have implications for the banking sector. 

On the fiscal side the nearly 30% fall in crude oil prices could lower the petrol prices by Rs12/litre and diesel prices by Rs10/litre in India from their present prices. The additional revenue accruing to Centre from increasing the excise duty (Rs 35,000-Rs 40,000 crores) could be spent on providing relief to people at the lower strata who will lose income because of shutdown of commercial activity in states, the report said. 

Source : Times of India