The Reserve Bank of India’s Report on Currency and Finance (RCF) has estimated 6.5-8.5 per cent as a feasible range for medium-term GDP growth with a timely re-balancing of monetary and fiscal policies likely being the first step in this journey. It said price stability is a necessary pre-condition for strong and sustainable growth, besides proposing a blueprint for reforms.

The report said taking the actual growth rate of (-) 6.6 per cent for FY21, 8.9 per cent for FY22 and assuming growth rate of 7.2 per cent for FY23, and 7.5 per cent beyond that, India is expected to overcome Covid-19 losses only in 2034-35. 

The output losses for individual years have been worked out to ₹19.1-lakh crore, ₹17.1-lakh crore and ₹16.4-lakh crore for FY21, FY22 and FY23, respectively.

The report observed that recovery in economic activity remains stimulus-dependent, even as new risks to growth and inflation have emerged from the war in Ukraine and normalisation of monetary policy in the US. 

For restoring and recreating a policy environment conducive for private sector-led growth post-COVID, timely rebalancing of monetary and fiscal policies may become necessary given the current configurations of debt and liquidity, according to RCF

The report said the large surplus liquidity overhang has to be withdrawn — every percentage point increase in surplus liquidity above 1.5 per cent of Banks’ deposits causes average inflation to rise by 60 basis points in a year. One basis point is equal to 0.01 per cent.

Monetary policy has to assign priority to price stability as the nominal anchor for the future growth trajectory, it added.

Govt debt reduction vital

The RCF cautioned that growth is at risk once general government debt exceeds a threshold of 66 per cent 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, it said.

“Even under best possible macroeconomic outcomes, general government debt may not decline below 75 per cent of GDP over the next five years. If adverse scenarios materialise, debt may, in fact, hover above 90 per cent of GDP all through.

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

Other measures

The report underscored that reform measures already announced by the Government (including privatisation and asset monetisation, tax reforms, insolvency and bankruptcy code (IBC), and a fiscal policy focus on capex and infrastructure) need to be augmented with other measures to reverse the sustained decline in private investment and low productivity in the economy.

“What is needed includes 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; reducing the cost of capital for industry and improving resource allocation in the economy by promoting competition...,”the report said.

Further, there is a need to encourage industries and corporates to scale up R&D activities; creating an enabling environment for start-ups and unicorns; encouraging corporate investment in agriculture; addressing the challenges faced by the debt-ridden telecom industry and DISCOMs; rationalisation of subsidies that promote inefficiencies; encouraging urban agglomerations by improving the housing and physical infrastructure.

The report opined that industrial revolution 4.0 and committed transition to a net-zero emission target will create new investment opportunities powered by technology and environmentally sustainable production processes.

RCF emphasised that it is necessary to wean away public sector banks (PSBs) from their dependence on the government for recapitalisation.

“On a positive note, a beginning in this direction has already been made with larger and stronger PSBs raising significant resources from the market. Stronger corporate governance norms in the banking segment is a priority area. Efforts need to be made to strengthen the compliance culture that adapts to norms not only in letter but also in spirit,” per the report.

Recognising the vastly altered financing requirements of the start-ups and unicorns, RCF said a policy framework for attracting risk capital needs to be put in place.

“Clearly, it is not enough to stabilise the economy and pull it out of the depths to which it had plunged during the first wave of infections and the dents made by the succeeding waves. “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,” RBI Governor Shaktikanta Das said in his foreword to RCF.