Mumbai: Lose-monetary policy alone cannot arrest the deepening slump, instead government must take demand-boosting measures, especially in rural areas, by frontloading expenditure primarily through the national rural employment scheme, says a report.
Economists at State Bank Research on Monday also warned that any attempt to trim government spending to maintain the fiscal numbers will be severely detrimental to growth.
"The current slowdown cannot be tackled by monetary policy in isolation. The government must address demand weakness by continuing to meaningfully frontload expenditure say through MGNREGA and PM-Kisan," the report said.
The PM-Kisan portal shows the number of beneficiaries under the scheme is only 6.89 crore against the target of 14.6 crore due to slow validation in farmer data. This has to be speeded up to boost rural demand, the report said.
Data from the MGNREGA website show that against total release from the Centre of Rs 45,903 crore (till September 13), total spend is around 73 per cent only or Rs 33,420 crore.
The budget has estimated capital expenditure of Rs 3,38,085 crore but till July, it has spent only 31.8 per cent of the allotted amount as against 37.1 per cent a year ago.
Private investment share has declined significantly from 50 per cent in value terms during 2007-14 to 30 per cent during 2015-19.
"In such a case, the government should clearly state up front that the additional fiscal spending is specifically for infra spending to boost demand and not for any unproductive purposes," the report said.
The headline fiscal deficit should stay at 3.3 per cent, while the additional fiscal impulse for infra spending could over and above this.
It said the RBI could also frontload large rate cuts in the October policy and also start doing open market operations that will keep the government bond yields in check.
"The government should go ahead with the overseas sale of sovereign bonds. It could partly hedge the borrowings and thereby decide to not bring back the dollar proceeds into the country," it said adding this will take care of the problem of RBI sterilisation and could also solve the problem of hedging.
The report also called for allowing FPIs to acquire stressed assets through the bankruptcy process instead of going through asset reconstruction companies.