THE GIST of Editorial for UPSC Exams : 05 August 2019 (The misplaced faith in an easy money policy (Mint))

The misplaced faith in an easy money policy (Mint)

Mains Paper 3: Economy
Prelims level : LTCG tax
Mains level : Key emphasis on RBI’s monetary policy

Context

• The reaction of global markets to the US Federal Reserve’s monetary stance suggests investors are vesting too much faith in easy money to promote investment and growth.

Key emphasis on monetary policy

• The RBI does have more leeway to reduce its repo rate now that the Fed has lowered its own lending rate in the US by a quarter percentage point
• An RBI rate cut may stem the slide in stock prices, but this can be rationalized only by virtue of the signal it sends of RBI’s intent to aid a sluggish economy, not for a quick revival

Major limitations

• There is evidence to suggest that the efficacy of monetary policy is diminishing.
• In the West, this is largely because the cost of capital is already very low by historical standards.
• Much cheap credit goes into chasing higher-paying assets around the world instead of spurring business activity.
• In India, monetary policy is even less potent in spurring investment. Various other factors beyond the cost of capital act as a drag.
• Of the three- quarters of a percentage point reduction in RBI’s repo rate this year, banks have passed on barely half. With consumption on a downtrend, the will of companies to borrow and invest is weak

Way ahead

• What might restore market sentiment are renewed inflows from abroad into Indian shares and securities set off by the Fed’s move.
• Infrastructure spending spree, implementing a set of major reforms that allow market forces to play an effective role in most of the arenas
• Easing land acquisition rules and turning the country’s labour market flexible could have a dramatic effect on India’s appeal as an investment destination
• Reversal of some income tax rules seen as extortionary by rich investors , LTCG tax could be given a rethink.

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Prelims Questions:

Q.1) What are Immuvac and VPM1002, recently seen in news?
A. New Rotavirus vaccines.
B. Exoplanets
C. New Tuberculosis (TB) vaccines
D. None

Answer: C
Mains Questions:
Q.1) If monetary easing by RBI does not help much and foreign inflows are uncertain, what should Indian policymakers do? Comment.