Bring down government debt to sustain growth, says RBI report

The Reserve Bank of India (RBI) has suggested that the government bring down its debt to 66% of the gross domestic product (GDP) over the next five years to secure India’s medium-term growth prospects.


Reducing India's debt is important especially as the monetary policy moves towards prioritising price stability and output stabilisation. In an annual report on currency and finance the theme for which was post Covid revival and reconstruction, the central bank said the government reforms like privatisation and asset monetisation, GST and corporate tax rationalisation, targeted sector specific incentives to raise production, exports under the production-linked incentive (PLI) scheme and insolvency and bankruptcy code (IBC) must 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 lowcost 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; encouraging industries and corporates to scale up R&D activities with an emphasis on innovation and technology; 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 said.

A three member team consisting of Sarat Chandra Dhal, Debojyoti Mazumder and Saurabh Sharma worked on two scenario analysis on medium term growth rates ans predict a steady state growth range of between 6.5% to 8.6%. To be sure, the report is prepared by the RBI's research team and the recommendations should not be construed as that of RBI's. Timely rebalancing of monetary and fiscal policies will be the first step in getting to a steady state of growth, the report said. "First, the large surplus liquidity overhang has to be withdrawn - every percentage point increase in surplus liquidity above 1.5 per cent of NDTL causes average inflation to rise by 60 basis points in a year. Monetary policy has to assign priority to price stability as the nominal anchor for the future growth trajectory," the report said.

The report calls for a comprehensive plan to revive the rural economy. "Organising farmers’ clubs or agricultural cooperatives is a possible solution to correct the pricing imbalances by reducing gaps between farm gate prices and retail prices. In this regard, the development of a modern supply chain infrastructure needs priority attention.

There is a need to adopt a viable ‘whole of business’ approach covering all aspects of farming to break farmers’ dependence on money lenders," it said. Stronger growth and improvement in income and employment outlook is critical for raising the savings of households. As demand recovers on the back of policy stimulus, enhancing the capacity of the financial system to propel stronger and inclusive growth must be prioritised, the report said. In his foreword for the report, RBI governor, Shaktikanta Das said the challenge post Covid is to generate a virtuous cycle of greater opportunity for entrepreneurs to innovate and invest and for 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. "The resilience of certain sectors like agriculture and allied activities, information technology services, exports, digitalisation and renewable energy during the COVID-19 crisis gives us the confidence that the Indian economy can stage a strong comeback," Das said.

It is necessary to wean away public sector banks from their dependence on the government for recapitalisation, the report said while noting that larger banks are also raising resources from the market. Going forward, the economy’s growing reliance on the digital ecosystem help harness the benefits of low-cost resource allocation and distributive efficiency. "Care, however, needs to be taken to protect the stakeholders from digital frauds, data breaches and digital oligopolies. Recognising the vastly altered financing requirements of the start-ups and unicorns, a policy framework for attracting risk capital needs to be put in place. Given the large long-term financing requirements of the infrastructure sector, NaBFID may have to scale up quickly and explore ways to attract resources from insurance, pension and provident funds," the report said.