Indian Economy Can Grow At 6.5-8.5% In Medium Term, Says RBI
India’s medium-term growth outlook hinges critically on policy measures to address structural bottlenecks, an RBI report said.
The Indian economy can sustain a GDP growth rate of 6.5-8.5% in the medium term, contingent upon a series of reforms, the Reserve Bank of India said in its annual ‘Currency and Finance Report’ themed ‘Revive and Reconstruct’.
The central bank acknowledged that economic activity has barely recovered to pre-Covid levels as it faces challenges from the legacy of deep-rooted structural bottlenecks as well as the scars of the pandemic.
The Russia-Ukraine conflict has also dampened the momentum of recovery, with its impact transmitting through record high commodity prices, weaker global growth outlook and tighter global financial conditions, it said.
Growth risks from geopolitics-induced supply shocks look more acute for oil importers such as India that are already facing a tight fiscal position due to the pandemic-related relief packages by the government, it said.
Frail household balance sheets and labour displaced from contact-intensive activity have impacted consumption demand. As a result, the trend growth path of India may have shifted downwards, the report said.
India’s medium-term growth outlook hinges critically on policy measures to address structural bottlenecks and harness emerging new growth opportunities.
“A feasible range for medium-term steady state GDP growth in India works out to 6.5–8.5%, consistent with the blueprint of reforms.”
A timely rebalancing of monetary and fiscal policies is needed and is the first step in moving towards steady state of growth, the central bank said. Price stability is a necessary precondition for strong and sustainable growth.
“The recovery in economic activity remains stimulus-dependent. 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.”
The RBI also called for reducing general government debt to below 66% of GDP over the next five years to secure India’s medium-term growth prospects.
Recovery: Uneven And Incomplete
At present, various sectors of the economy are at different stages of recovery. While agriculture remained resilient all through different waves of the pandemic, manufacturing and construction are on the path to recovery.
While green shoots of revival are visible in contact-intensive services sectors such as trade, hotel, transport and communication, they continue to suffer.
The private corporate sector has shown robust resilience as firms adopted new modes of operations and aligned their business strategies to the new environment for doing business. Still, a disaggregated firm-level analysis, reveals uneven recovery across the weak and strong firms.
Taking the actual growth rate of -6.6% for 2020-21, 8.9% for 2021-22 and assuming growth rate of 7.2% for 2022-23, and 7.5% beyond that, India is expected to overcome Covid-19 losses in 2034-35.
Structural Reforms
The report suggested a series of next generation reforms to help India achieve a higher sustainable level of growth.
These include:
Enhancing access to litigation free low-cost land.
Raising the quality of labour through public expenditure on education and health and the Skill India Mission.
Scaling up R&D activities with an emphasis on innovation and technology.
Creating an enabling environment for startups and unicorns.
Rationalisation of subsidies that promote inefficiencies.
Encouraging urban agglomerations by improving the housing and physical infrastructure.
The development of a modern supply chain infrastructure
Developing numerous small-scale irrigation projects as well as using wind energy to lift water from bore wells in India’s drought prone areas.
A strategy to meet the financing requirements for the National Infrastructure Pipeline.
Building an unemployment insurance fund during periods of economic boom at the firm level, which can be utilised to financially support workers up to a limited period after retrenchment.
Universal access to social security irrespective of firm size, with each firm required to earmark a certain percentage of their profit for the social security schemes for the workers.
Also, an industrial revolution 4.0 and committed transition to a net-zero emission target, according to the report, warrant a policy ecosystem that facilitate adequate access to risk capital and a globally competitive environment for doing business.
In a sequel to the pandemic, India is set to unleash impulses of animal spirits and poised to move to a higher growth trajectory with digital startups and ventures, biomedical, pharmaceuticals and healthcare sectors emerging as new winners, the report said.