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Price stability is a necessary precondition for achieving strong and sustainable growth in the post-pandemic era, the Reserve Bank of India (RBI) said in its report on currency and finance for 2021-22. Characterising high levels of government debt as yet another risk to growth, the central bank called upon the government to reduce its debt to below 66% of gross domestic product (GDP) over the next five years.

The theme of the report is “Revive and Reconstruct” in the context of nurturing a durable recovery post-Covid and raising trend growth in the medium term. In a chapter titled ‘A Policy Agenda for Post-Covid-19 India’, the RBI said that a feasible range for the medium-term steady state GDP growth in India works out to 6.5-8.5%. “Timely rebalancing of monetary and fiscal policies will likely be the first step in this journey,” the report said.

The report outlined the steps that need to be taken to move to a steady growth trajectory. First, the large surplus liquidity overhang will have to be withdrawn. Every percentage point increase in surplus liquidity above 1.5% of net demand and time liabilities (NDTL), or deposits with the banking system, causes average inflation to rise by 60 basis points (bps) in a year, RBI said, adding, “monetary policy has to assign priority to price stability as the nominal anchor for the future growth trajectory”.

The monetary policy committee (MPC) has already affirmed its commitment to prioritise inflation over growth at its April meeting, starting with a focus on the withdrawal of accommodation.

The second factor posing a risk to growth, according to the report, is general government debt exceeding a threshold of 66% of GDP. Reducing debt to more sustainable levels that are compatible with the growth trajectory being envisaged for a post-pandemic Indian economy will be daunting, the RBI said. Even under the best possible macroeconomic outcomes, general government debt may not decline to below 75% of GDP over the next five years. If adverse scenarios materialise, debt may even hover above 90% of GDP all through.

“A medium-term strategy of debt consolidation aimed at reducing debt to below 66% of GDP over the next five years is, therefore, important to secure India’s medium-term growth prospects,” the report said.

The central government intends to borrow Rs 14.95 trillion in FY23, of which Rs 8.45 trillion will be raised during the first half of the financial year. India’s debt-to-GDP ratio, including debt of the Centre and states, was 89.6% in FY21 and the International Monetary Fund (IMF) has projected that it will rise to a record 90.6% during FY22.

Aimed at laying down a blueprint for reforms, the chapter said that economic progress rides on seven wheels – aggregate demand; aggregate supply; institutions, intermediaries, and markets; macroeconomic stability and policy coordination; productivity and technological progress; structural conditions; and sustainability.

It suggested a set of structural reforms central to reviving and reconstructing the Indian economy from the ravages of the pandemic. While acknowledging the government’s announcements in the areas of privatisation, tax reforms, the production-linked incentive (PLI) scheme, insolvency legislation, labour reforms and its focus on capex and infrastructure, the RBI advocated the use of further measures to reverse the sustained decline in private investment and low productivity in the economy.

The structural reforms suggested by the central bank include enhancing access to litigation free low-cost land, raising the quality of labour through large-scale expansion of public expenditure on education, health and the Skill India Mission, as also reducing the cost of capital for industry and improving resource allocation in the economy by promoting competition.

The government must also encourage industries and corporates to scale up research & development (R&D) activities with an emphasis on innovation and technology, create an enabling environment for start-ups and unicorns and encourage corporate investment in agriculture. The central bank highlighted the need for addressing the challenges faced by the debt-ridden telecom industry and power distribution companies (discoms), rationalisation of subsidies that promote inefficiencies, and encouraging urban agglomerations by improving housing and physical infrastructure.

Other areas that need work include a road map for achieving more sustainable growth and a focus on improving the quality of technology transfers to India. A committed transition to a net-zero emission target will create new investment opportunities powered by technology and environmentally sustainable production processes, the report said.

Stating that the PLI scheme recognises growth opportunities in 14 key manufacturing sectors, the RBI said it is important that global quality benchmarks are put in place for new capacities to be created in identified sectors under the PLI scheme.

Similarly, there is scope for achieving better terms of trade while negotiating free trade agreements (FTAs). “India’s ongoing and future free trade agreement (FTA) negotiations may focus not only on securing greater market access for domestic goods and services but also on better trade terms for high quality imports from partner countries and transfer of technology,” the report said.

In his foreword, RBI governor Shaktikanta Das said the challenge is to generate a virtuous cycle of greater opportunity for entrepreneurs to innovate and invest – businesses to attract more capital and technology; and fiscal space to manage the distributional effects of the pandemic while expanding public investment in physical infrastructure and human capital.

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Author: Howard Caldwell