Context: Medium Term challenges to the economy have restricted the Reserve Bank of India’s (RBI) ability to reduce the rates. Both the RBI and government have to come together to revive the demand.
Medium-Term Economic Challenges:
Economy settling at lower than pre-COVID levels: Most indicators point to economic momentum settling at 10-15% below COVID levels in the near-term.
For E.g. electricity demand was 92% of the pre-COVID level in July compared with 75% in April. GST collection is at 86% of pre-COVID levels.
Low Consumer Spending: Lower discretionary demand is expected according to the Consumer Confidence Survey conducted by the RBI.
With muted consumption, capacity utilization, which had fallen to 68.2% last December, has fallen further in the last few months.
Decline Investments: Even in the case of lower interest rates:
Increased Risk Premium: Spread between 3-year AAA corporate bonds and sovereign bonds rose to 276 basis points.
Way Forward:
Restructuring Packages for Businesses and Households:
There has been a sizeable reduction in a moratorium in June from 50% in April for all scheduled commercial banks (SCBs).
As economic activity normalizes further, the need for restructuring will be even lower.
Steps by the Centre: better time to apply Keynesian economics
Even with net tax collections at 53% of last year’s levels, the Centre has increased its spending by 13% over 2019-20.
Centre has already expanded its gross borrowing to ?12 trillion.
Centre and states will have to spend to crowd-in private sector spending.
Role of RBI: Not only to act as the lender of last resort but also as a buyer of government securities.
To remain vigilant of impending risks to growth and inflation, and be ready to act.