Easy Rate Policy Spurs Inequality, Ex-India Central Banker Says

A worker throws sheets of veneer onto a pile at a plywood manufacturing workshop in Muzaffarpur, Bihar. (Photographer: Prashanth Vishwanathan/Bloomberg)

Easy Rate Policy Spurs Inequality, Ex-India Central Banker Says


India’s easy monetary policy response to the pandemic risks stoking income inequalities and asset price bubbles, while more fiscal support is needed, particularly for the most-vulnerable, according to a former central banker.

Viral Acharya, a hawkish central banker during his term as deputy governor of the Reserve Bank of India from 2017 to 2019, sees record-low interest rates mainly benefiting large companies and the formal economy. But the government should focus on programs such as direct benefit transfers that will help address inequalities, Acharya said in a presentation, titled “Covid Lessons from India and Other Emerging Markets,” which he made available to Bloomberg News.

Monetary stimulus, including 115 basis points of rate cuts, did most of the heavy lifting to keep the economy going through the pandemic last year. While the government did announce a string of fiscal measures, a majority of it were in the form of loan guarantees for small businesses, tax breaks for service providers and easier foreign direct investment rules.

“Fiscal policy is perhaps what is mostly called for in a pandemic-style shock which has sharp inequality-inducing implications,” Acharya said in the presentation made late last week.

He called on authorities to focus on women, the poor and India’s vast informal economy where millions of workers have lost their livelihoods due to the steps to control the coronavirus outbreak. He also urged authorities to provide incentives to boost health care capacity in inaccessible rural areas and slums.

Finance Minister Nirmala Sitharaman last week unveiled fresh aid, including extension of the loan-guarantee program, to cushion the economic impact of the pandemic’s second wave. The measures are seen by most economists as falling short, thus forcing the RBI to stay accommodative for longer despite growing price pressures.

Easy Rate Policy Spurs Inequality, Ex-India Central Banker Says

The easy monetary policy stance “appears to be fueling income equality by encouraging inflation,” Acharya said, adding that he was not sure whether booming corporate profits was a sign of an economic rebound or the result of companies squeezing workers and savers.

India’s six-member Monetary Policy Committee headed by Governor Shaktikanta Das is seen tolerating inflation rates well above the RBI’s 4% medium-term target as support to economic recovery takes center-stage. Michael Patra, who succeeded Acharya as deputy governor at RBI, is of the view that the current inflation spell is supply-side driven and will turn persistent only when demand kicks in.

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