The time is apposite for private investment to come alive as fiscal policy, with the largest capital expenditure budget ever and emphasis on doing business better, has offered to crowd it in, according to an article in the Reserve Bank of India’s (RBI) monthly bulletin.

“All engines of aggregate demand are starting to fire; only private investment is missing in action...Will Indian industry and entrepreneurship pick up the gauntlet?” per the article “State of the Economy” put together by RBI Deputy Governor MD Patra and 19 other RBI officials.

The authors underscored that there is little doubt today that a recovery based on a revival of consumption is underway.

“The jury leans towards such recoveries being shallow and short-lived. The key is to whet the appetite for investment, to rekindle the animal spirits...,” they said.

GDP reclaims positive territory

Referring to real GDP in Q3 (October-December 2020) shrugging off the contraction of H1 (April-September 2020) and reclaimed positive territory, the article observed that with this emergence from recession as businesses reopen and consumers venture back to offices and shops, the Indian economy has turned a corner.

“These developments are all inflation positive. With pulses production 6 per cent higher than a year ago, inflationary pressures on the food front are set to ebb, but core inflation will warrant deft and dogged attention,” the article said.

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While disproportionately high excise duties on petroleum products are hostage to the state of public finances, buoyancy in other heads of revenue could loosen this stranglehold, bring down pump prices of petrol, diesel and of cooking gas to more internationally comparable levels, improve the inflation outlook and expand consumer welfare, it added.

“From an internationally competitive perspective too, it is important for India to recover from being an inflation outlier and turn to structural reforms that reposition the economy to reap the gains of productivity and efficiency,” the authors said.

Rock and hard place dilemma

The article assessed that the evolution of financial conditions as 2020-21 draws to a close and the new financial year commences will pose a challenge.

The authors opined that fiscal policy authorities face the ‘rock’ of stimulating the economy and the ‘hard place’ of ensuring sustainable finances.

Monetary authorities encounter a similar dilemma of conflicting pulls – ensuring an orderly evolution of the interest rate structure in the face of still enlarged borrowing needs against the need to remain accommodative and support the recovery.

“While policy authorities exhibit resoluteness in their commitment, markets are assailed by uncertainty and sporadic shifts between hunts for returns and flights to safety.

“A shared understanding and common expectations will likely be the anchor in this turbulence,”the article said.

The authors feel the markets have to rely on the track record of authorities during the most trying year in a century – of keeping markets and institutions functioning; of easing borrowing costs and spreads; of keeping finance flowing – “in fact, there is very little else to hang a hat on.”

They emphasised that“An orderly evolution of the yield curve serves all. A vibrant and self-sustaining economy will lift all boats and markets can do no better than supporting policy authorities as they struggle to regain that stride.”

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