RBI’s annual report confirms pain of economic slowdown

Mangalore Today News Network

Aug 30, 2019: The Reserve Bank of India’s annual report categorically makes it clear that reviving growth is the highest priority for policymakers at this juncture.

 

The main theme of the RBI’s annual reports in the previous years was the bank NPA issue and systemic vulnerabilities of financial institutions. But this year’s report is mostly devoted to describing the nature of the current economic slowdown and the way out.

In this year’s annual report, the RBI says ongoing growth deceleration is a "soft patch mutating into cyclical downswing" but not a structural one. This, however, is contrary to the assessment among a section of economists that the downturn is turning structural in nature.

The RBI notes that the lack of domestic demand is impacting ’animal spirits’ and tells the government it needs to urgently focus on reviving private investments and consumption. The annual report has pegged the FY20 growth at 6.9 percent, with growth likely to remain in the range of 5.8-6.6 percent in the first half and thereafter likely to pick up to 7.3-7.5 percent in the second half. RBI’s ’growth talk’ assumes much significance. In short, the RBI  is showing a mirror to the government about the actual state of the economy and pointing out where the problem lies.

The report wants the government to strengthen the banking and non-banking sectors. The NBFC sector is in a mess and the liquidity problem got worsened after the IL&FS crisis last year. NBFC lending has come down impacting the flow of credit to industries that used to heavily rely on non-banking sources. On the other hand, the banking sector too is just emerging out of a major NPA cleanup cycle; banks are extra cautious about taking additional risks on account of the weak capital position and fearing future build-up of NPAs.

The government has promised Rs 70,000 crore capital to public sector banks but of that, a substantial chunk will go towards NPA provisioning and mandatory reserve requirements. The public sector banks (PSBs) will require a much bigger chunk of capital infusion to substantially kickstart the credit growth cycle, a much-needed factor for economic recovery.

The RBI has also reminded the government about the need to speed up structural reforms. These include big investments in infrastructure and speeding up of labour laws, taxation and other legal reforms. The 2019 Union Budget spoke of the government’s intent to revamp archaic labour laws. This needs to be put on a priority list for implementation.

Early this week, the government announced a series of measures to ease Foreign Direct Investment (FDI) rules across segments and this indicates that Narendra Modi government’s continuing reform focus. This indeed sends a positive signal to the economy. At a time when the domestic demand scenario shows no signs of revival and the GDP growth is struggling to rebound, it makes immense sense to seek bigger participation from large global investors. The government has opened up or eased rules FDI rules in four sectors €" 100 percent FDI in coal mining, contract manufacturing and insurance intermediaries under automatic route and 26 percent FDI in digital media after government approval.

But, these measures aren’t enough. The domestic demand can be revived only by investing big in local infrastructure projects. The government just received Rs 1.76 lakh crore surplus transfer from the Reserve Bank post the recommendations of the Bimal Jalan committee recommendations that include about Rs 52,000 crore additional transfer as per the revised economic capital framework. The government, which is facing a revenue shortfall might as well use this money to stay on course of the planned fiscal deficit roadmap. But, if it chooses to use this money for infrastructure spending, economy recovery can be quickened to that extent.

Courtesy:Yahoo.com