Wide-ranging structural reforms needed to return economy to strong growth: RBI
The COVID-19 pandemic will inflict deep disfigurations on the world economy and India’s potential output could undergo a structural downshift as the stimulus-driven recovery gets unwound, the Reserve Bank of India (RBI) said in its annual report released on Tuesday. The recovery this time around is also likely to be different than the previous financial crisis, the central bank feels.
“The global financial crisis occurred after years of robust growth with macroeconomic stability; by contrast, COVID-19 has hit the economy after consecutive quarters of slowdown,” RBI noted.
India’s economy had already started slowing down over the last year. In the year-ended March 2020, the GDP growth declined to 4.2 per cent, versus 6.9 per cent in the previous year. The growth last financial year was the lowest in the past 11 years. This year ending March 2021, the GDP is expected to contract -4.5 per cent.
RBI pointed that the global financial crisis of 2008-09 was essentially a financial meltdown, but the pandemic was a health crisis, which would have “deleterious ramifications across real and financial sectors.”
The RBI has responded to the pandemic with a slew of liquidity measures from the end of March, including a 110 basis points cut in the benchmark repo rate.
The Central government, too, announced several measures, including free foodgrains for the poor and credit guarantee fund scheme for small and medium enterprises, among other things. Several structural steps in mining and agriculture were also announced. Although, there was criticism that the measures would not help fuel demand.
Post pandemic, the RBI feels, that only structural reforms across sectors would help India’s economy get back to strong growth. “As stimulus is unwound in a calibrated and non-disruptive manner in a post-pandemic scenario, deep-seated and wide-ranging structural reforms in factor and product markets, the financial sector, legal architecture and in international competitiveness would be needed to regain potential output losses and return the economy to a path of strong and sustainable growth with macroeconomic and financial stability.”
With the economy already slowing over the past year, private sector had cut back on its capex spends as well.
Targeted public investment funded by monetisation of assets in steel, coal, power, land, railways and privatisation of major ports by the Central and state governments under an independent regulator can be the way forward to revive and crowd in private investment, said the RBI.
It in fact believes goods and services tax (GST) Council type of apex authorities can be set up in respect of land, labour and power to drive structural reforms.