Uday Kotak, the outgoing president of industry association CII, has identified fiscal support from the government as the need of the hour to limit the economic damage of the second wave of Covid-19. It makes sense and the government should act on it.
There are two reasons why none of the other levers will work. Monetary policy works through financial intermediaries like banks. Kotak says that with existing capacity utilisation rather low, an increase in private investment this year seems unlikely. Without an appetite for investment in the private sector, banks will have a limited role to play in an economic revival. Also, the current Covid-19 wave has hit rural India which means that no one is sure what the impact on rural demand will be.
Also read: Calibrate opening-up of economy with vax, says Uday Kotak
In this situation, only fiscal policy, that is, additional spending by the government, can revive the economy. The overriding priority of the government should be to improve the economic environment. Growth is the foundation for achieving all the other goals the government has.
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