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Friday, 7 August 2020

‘Empower states to revive economy’

Manpreet Badal

Over the years, the Reserve Bank of India has treated a 4 per cent inflation rate as something of a holy grail. Anything above that, and the central bank becomes uncomfortable and responds with a rate hike. Therefore, the decision, as articulated by RBI Governor Shakti Kanta Das, that the Monetary Policy Committee has decided to leave both the repo as well as the reverse repo rates unchanged, does come across as a surprise.

But scratch the surface, and one will realise RBI's decision is more based on optimism and less on economic rationale. An inflation rate of almost 6.10 per cent should have necessitated some interest rate adjustment, but the RBI has dismissed this inflation as supply chain glitches.

Even if one assumes that the situation will improve with the opening of the economy, one can't foresee the inflation rate coming down below 5.5 per cent for rest of this calendar year. This inflation rate actually is a pointer to an inconvenient truth that the Centre has been trying to ignore for a long time i.e. India is headed towards a stagflation period, of such seriousness that we haven't witnessed in several decades. With an inflation rate in excess of 6 per cent, a GDP which is contracting by a minimum 8 per cent (some credible estimates put it even higher) and a dearth of demand, the economy has all the signs of stagnation plus inflation. Even the venerable RBI Governor admitted to a contraction in the economy, but was reticent about rate of decline.

To bring about a meaningful turnaround in economy, Modi government will have to trust states and be large-hearted in empowering them to take their decisions. A lockdown that was introduced without any discussion with states has crippled states' taxation revenues and the centre's recent notice that GST reimbursement may not be what was promised, further imperils states' prospects.

One hopes that the Centre understands this and comes out with a savior plan based on cash transfers to citizens and economic packages for states.

(The writer is the Finance Minister of Punjab)



from The Tribune https://ift.tt/3a5anfr

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