The country's largest lender State Bank of India (SBI) said on Monday the contemporary issue for macroeconomists is to exclusively focus on assuring adequate aggregate demand as the current slowdown cannot be tackled by monetary policy in isolation.
"We believe the monetary policy could only act to some extent," it said in a report authored by Group Chief Economic Adviser Soumya Kanti Ghosh.
"Experience shows and we have been in an era of low interest rates for a decade. But that has done little to boost aggregate demand. Rather fiscal policy needs to be a major focus now, especially given what low or negative interest rates mean for the sustainability of deficits," he wrote.
Interestingly, total financial liabilities of Indian households have jumped by a massive 58 per cent in 2017-18 to Rs 7.4 lakh crore after 22 per cent jump in 2016-17.
"In fact, while household leverage has jumped two times in the past five years, disposable income has jumped by only 1.5 times, thereby putting pressure on savings. Even though the jump is not as much as in 2007 (when it jumped by 2.3 times over 2005), such a large jump is a matter of concern," said Ghosh.
Given such a large jump in household leverage, the question is, will monetary policy retain the effectiveness through large rate cuts in current scenario?
"Probably not, and only a counter cyclical fiscal response might address the core of current problem. A fiscal policy tool could solve both consumption and savings problem," he said.
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