WEF 2023: Economists Weigh On Striking Fine Balance Between Fiscal, Monetary Policies
If there is one thing that has changed in the last 12 months with regard to fiscal and monetary policies across economies, it is their unidirectional alignment. The past year rejigged some norms where governments in the past, for a long time, could borrow more but at the same time pay less overall debt servicing costs.
Governments today have the challenge of responding to the cost-of-living crisis and ensuring that they don’t make the job of central banks harder by deviating from the path of fiscal prudence in a high inflationary environment.
Gita Gopinath, First Deputy Managing Director, International Monetary Fund delving into this difficult conjuncture, said that central banks have the challenging task of taming inflation, but at the same time, we have high prices for food which calls for fiscal policy to provide support to the most vulnerable in the society.
“You have an inflation problem to deal with, but you are still hit with shocks, like food and energy shocks, that require fiscal policies to step up. And that is making the current conjuncture particularly difficult,” she said while speaking during a panel discussion at the World Economic Forum in Davos.
Former Reserve Bank of India (RBI) Governor Raghuram Rajan said that in the long term, the fiscal and monetary policy would remain more in conflict rather than having any coordination.
He contended that central banks across the world are determined to bring inflation down, but spending remains high, adding that the prospect of spending is also not becoming more targeted over time.
Gopinath, however, argued that Rajan’s long-term outlook of fiscal and monetary policies being in conflict would not play out because of inflation expectations behaving in a well-anchored fashion and short-term inflation expectations coming down.
She suggested that fiscal policy should be consistent with bringing inflation down, implying that it should not be expansionary at an overall level.
She added that fiscal policies should protect the most vulnerable, have a sound medium-term fiscal framework, and build up buffers for it.
As the government in India gears up for its last budget before the 2024 General Elections, economists have warned that India needs to remain on the path of fiscal consolidation. It is expected that government will opt for narrowing the FY24 fiscal deficit to as low as 5.8 per cent in the upcoming budget, far lower than the 6.4 per cent budgeted for FY23.
Meanwhile, the RBI Monetary Policy Committee (MPC) will meet after the budget for its February meeting, where analysts expect the MPC to deliver a 25-basis points repo rate hike even as retail inflation cooled off in December and stayed below RBI’s tolerance band of 6 per cent for a second straight month.
