Govt must lower GST rates and fuel prices to spur demand: Economist

    The government must try and increase the GST threshold to Rs 5 crore and also work towards lowering the average GST rates from the present 14% to spur demand, an economist said.

    With the Union government rolling out two rounds of stimulus in two days, Soumya Kanti Ghosh, group chief economic advisor, SBI, has suggested that the government also lower the automotive fuel prices by 30%, which will have its own set of benefits to increase demand.

    Speaking at a webinar of Bennett University, sponsored by Darwin Industries on Demand Management Policies at the Time of Pandemic (Fiscal and Monetary Stimulus), he said the aggregate demand has been impacted by the slowdown in the global economy. With no clarity on FDI inflows this year and next year and with the fact that there is excess capacity in the system due to deficient demand, the government must consider options. Bennett University is an initiative of Times Group.

    “Buying gold from the public is one, but that has its own set of issues, the other can be issuance of sovereign bonds or a zero coupon bond or a tax free bond,” he said.

    “From an Indian point of view while the pandemic will create a simultaneous demand and supply shock, the demand factor will be more important than supply as industry is already experiencing a significant excess capacity. In fact, a medium-term view of India’s economy suggests that the current loss of demand predates the outbreak of the pandemic. In principle, the deep negative supply shock could quickly translate into a demand shock particularly for economies like India where there is a significant loss of labour income,” he said.

    However, any fiscal package must also be accompanied by a structural reforms package so that it can turn this crisis into an opportunity.

    “The announcement by the government in this context is welcome as it also entails a vision of factor market reforms,” he added.

    Abheek Barua, chief economist and executive vice-president, HDFC Bank, said the government should consider monetizing the deficit without considering it as a catastrophe.

    The headline numbers of Rs 20 lakh crore looks huge and “its impact on fiscal deficit will be much muted,” he said.

    “Demand management policies through monetary policy has to address two sets of challenges. First, interest rates have to be kept low to spur demand. This will be in a situation of unprecedented borrowing by the government to fund its fiscal deficit that will have a natural tendency to push interest rates up,” he said.

    Simply infusing liquidity or cash into the system might help in keeping short-term rates low but the government typically borrows long-term. Thus, along with liquidity infusion and cuts in the policy rate, the RBI has to find ways to keep long term interest rates down as well.

    “This is important since key interest rates that impact households such mortgage rates or car loan EMIs are tied to the long-term rates that the government borrows at (the 10-year government bond yield for instance),” he added.

    “In this context, options such as “monetization” of the fiscal deficit need to be considered.

    While fiscal policy could work to ‘guarantee’ risky loans, monetary policy ensures that banks have sufficient funds to lend and at low rates. With high default risk, merely guaranteeing loans might not always do the trick, he said.

    Source- Times of India.

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