Growth Risks

Context: The Reserve Bank of India’s (RBIs) Annual Report gives out cautious signals towards the stressed medium-term growth and increased debt burden. India needs reforms to enhance productivity.

Challenges before the Economy: 

• The future is likely to be conditioned by the large debt overhang and contingent liabilities accumulated during the pandemic.
• The fiscal deficit would be much higher, the debt burden would increase significantly, and the financial sector would be in worse shape.

Way Forward

• Make careful assumption about the future:

• Setting priorities: What is possible in terms of growth, poverty reduction, and the sustainability of a welfare system that is haphazardly being born. 

• Reorient the Budget Expenditure.

• Look over Strategic Challenges: China promises once again set to become the fastest-growing economy despite its shrinking working-age population.

• Policy Changes to increase productivity:

• Favourable prices, such as continued cheap oil, facilitated by slower global growth provides a growth environment
• Integration into global supply chains: The government plans to build multi-modal industrial clusters, aided by investment from overseas manufacturing companies.

• Industrial Housing and Urban Management:

• To tackle large-scale migration
• Lower the cost of labour due to lowered housing and transport costs.

• End Cross Subsidies:

• Power Subsidies: which raises the cost for manufacturers.
• Transport Subsidies: which raises the cost of freight.

• Transformed Financial Sector: that delivers adequate and cheaper credit, especially to micro, small, and medium enterprises
• Flexible labour policies without sacrificing worker safety nets.

Conclusion: India would soon need a new medium-term fiscal plan, as sustained higher deficit and debt could increase risks to economic stability and growth.