Three Economic Risks In Need Of Mitigation Plans

Livemint     5th July 2021     Save    

Context: RBI’s Financial Stability Report outlines inflation, a reversal of capital inflows and lenders’ rising bad assets as potential hazards.

Macroeconomic risks in the Indian economy

  • Growing inflationary tendencies: As the nascent revival of economic growth post-pandemic collided with impaired capacities.
    • Risk of an imported commodity inflation spillover from the global market exists. 
  • External risk factors: US Federal Reserve recently indicated that it might start raising interest rates sometime in 2023; this could trigger retrenchment of global capital flows.
  • Continuing pandemic uncertainties: As the Indian economy picks up slowly and unevenly, in step with the fluctuating pace of covid vaccination and asymmetric opening up across regions.
  • Deepening fault lines of our domestic banking sector: Balance-sheet damage in banking sector lurks behind extended regulatory forbearance.
    • The government, the sector’s main provider of capital, has limited resources that are being pulled in different directions.

Way forward: Ideas to consider in mitigating the risks

  • Avoid the use of forex reserves: Since there is a risk in countering any ‘taper tantrum’ if and when capital inflows reverse, and the forex reserves will be needed to neutralise the effect.
  • RBI should be flexible with policy rates: To adequately address the risks of inflation.
    • The low-interest rates have helped secure neither capital expansion nor economic growth but aided indebted wholesale borrowers.
  • Review public bank privatisation strategy: Full scale privatisation is unfeasible at this juncture. However, the sale of small parcels of fresh equity to retail and institutional investors can be looked into.