Economy can sustain GDP growth of 6.5-8.5%, says RBI

MUMBAI: The 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, said the Reserve Bank of India (RBI) in its annual currency and finance report themed Revive and Reconstruct. The report also said that the Indian economy can sustain a medium-term steady-state gross domestic product (GDP) growth of 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 for restoring and recreating a policy environment conducive for private sector-led growth post-Covid.

Next would be a mediumterm transparent strategy of debt consolidation aimed at reducing general government debt to below 66% of GDP at the earliest as being critical to secure the medium-term growth prospects of India.

“The debt path over the next five years, even under the bestcase scenario, may further squeeze fiscal space unless strategic policy efforts covering both taxes and expenditure aim at targeted consolidation,” the report said.

RBI also suggested structural reforms including 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.

Also, scaling up research and development activities with an emphasis on innovation and technology, creating an enabling environment for start-ups and unicorns, rationalisation of subsidies that promote inefficiencies, and encouraging urban agglomerations by improving housing and physical infrastructure will be key, the report said.

“Industrial revolution 4.0 and committed transition to a netzero emission target warrant a policy ecosystem that facilitates provision of adequate access to risk capital and a globally competitive environment for doing business,” it stated.

Corporate balance sheets have coped with the pandemic by deleveraging and increasing liquid assets, but investment appetite that should motor a renewed capex cycle is still weak.

Frail household balance sheets and labour displaced from contact-intensive activity have impacted consumption demand. As a result, the growth path may have shifted downwards, warranting urgency in putting in place a comprehensive range of measures for reinvigorating growth, it said.

DEBT PATH OVER NEXT FIVE YEARS MAY FURTHER SQUEEZE FISCAL SPACE WITHOUT POLICY EFFORTS, THE REPORT SAID