It’s time to rebalance – News

As India grapples with rising inflation as seen across the world, RBI lays out a new blueprint for a resilient economy

Published: Mon 15 August 2022, 00:00

Countries around the world have apps with unprecedented levels of inflation. In the United States, the inflation rate increased by an unprecedented 8.6% in May 2022, reaching a 40-year high.

Across the rich OECD group of countries, inflation has reached 9.2% – the highest rate since 1988. Britain has the highest rate in the rich G7 group of countries – the UK, US, Canada, France, Italy, Germany and Japan – with the Consumer Price Index (CPI) measure of inflation hit 9% in April, the highest since 1982, according to a report published by ‘The Guardian’.

India has also faced a similar complication, with inflation reported at 7.04% in May and the country will likely take another 13 years to recover from the losses suffered due to the Covid-19 pandemic that has hit the country. in March 2020, says an RBI report.

Taking the real growth rate of 6.6% for 2020-21, 8.9% for 2021-22 and assuming a growth rate of 7.2% for 2022-23, and 7.5% beyond , India is expected to overcome Covid-19 losses in 2034-35, according to the RBI’s Currency and Finance Report 2021-22.

In India, retail price inflation exceeded the 6% upper tolerance band set by the Reserve Bank of India for the fifth consecutive month in May, while the Indian central bank expects it to remain elevated until in the third quarter of the current fiscal year 2022-23, before moderation. In addition, domestic wholesale price inflation has been in double digits for over a year now.

However, RBI Governor Shaktikanta Das told Indian media that India’s economy is well placed to weather the current challenges. “India’s economy has remained resilient and it is well positioned to weather challenges emanating from geopolitical developments. The banking sector remains resilient and sound. Overall, the macroeconomic figures also look decent overall,” a- he added.

Meanwhile, to control high inflation, the RBI raised policy rates or repo rates by 90 basis points cumulatively in monetary policy review meetings held recently.

The US Fed raised its benchmark interest rate by 75 basis points at its last meeting. This follows a 25 basis point increase in March and a 50 basis point jump in May. In total, the US central bank lifted 1.5 percentage points on a cumulative basis.

According to said report, the central bank said production losses for individual years were calculated at Rs 19.1 lakh crore, Rs 17.1 lakh crore and Rs 16.4 lakh crore for 2020-21, 2021-22 and 2022-23, respectively.

“The pandemic is not over yet,” the RBI said.

A new wave of Covid has hit China, South Korea and several parts of Europe. However, various economies are responding in divergent ways, ranging from a no-Covid policy in some jurisdictions (e.g. China, Hong Kong and Bhutan) on the one hand to those with relatively open borders and removal of restrictions. internal (eg Denmark and UK) , it said.

“In India, restriction levels are dynamically calibrated locally in response to changing circumstances,” the RBI said. With the ongoing conflict between Russia and Ukraine, downside risks to global and domestic growth are heightened due to soaring commodity prices and global supply chain disruptions, a- he added.

Supply constraints and longer delivery times have driven up shipping costs and commodity prices, intensifying inflationary pressures and threatening the nascent economic recovery across the globe. India has also felt the pressure of global supply chain disruptions, with supplier delivery time falling to its all-time low of 29.5 in April 2020, according to the report.

The reform plan proposed in the RBI report revolves around seven wheels of economic progress: aggregate demand, aggregate supply, institutions, intermediaries and markets, macroeconomic stability and policy coordination, productivity and technological progress, and structural change and sustainability.

He said an achievable range for India’s medium-term GDP growth is between 6.5 and 8.5 percent, in line with the reform plan. “Timely rebalancing of monetary and fiscal policies will likely be the first step on this journey,” the RBI report said.

He also said that price stability is a necessary precondition for strong and sustainable growth. Reducing general government debt to less than 66% of GDP over the next five years is important to securing India’s medium-term growth prospects, the RBI said.

The report suggested structural reforms, including improving access to low-cost, dispute-free land, improving the quality of labor through public spending on education and health, and to the Skill India mission, the intensification of R&D activities with a focus on innovation and technology, the creation of an enabling environment. for startups and unicorns, streamlining subsidies that promote inefficiencies and encourage urban agglomerations by improving housing and physical infrastructure.

“Industrial Revolution 4.0 and the committed transition to net-zero emissions warrant a policy ecosystem that facilitates the provision of adequate access to venture capital and a globally competitive environment for doing business,” a- he declared.

The RBI said PSU banks should not be dependent on the government for recapitalisation. In the medium term, there is a need to wean the PSBs from their reliance on government recapitalization, this will be an important precondition for achieving greater privatization of the sector, the RBI report on the currency and finance.

To increase competition in the banking sector and introduce innovation, the RBI’s “on-demand” licensing policy for universal and small-scale financial banks can be used effectively. However, capital injection should not substitute for better governance and risk control, he said.

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