<p>The Reserve Bank of India’s annual report, released on Tuesday, presents a bleaker picture of the economy for the current financial year than had been predicted till now. It has warned that “more protracted spread of the coronavirus pandemic, deviations of the monsoon from the predicted normal rains and global financial market volatility” are key downside risks to growth. The contraction will be severe, and it will take much time to regain even the slow growth of the months preceding Covid-19. The lockdown has badly hit consumption. Since the situation is still evolving, RBI has refrained from estimating how much the economy will contract. The report noted that the uptick in the economy noticed in June after the lockdown was partially lifted in some areas has been lost after the re-imposition of restrictions in July and August. It hopes to see a turnaround only in early 2021, when inflation, too, which is above the comfort level now, may ease. The RBI’s space for monetary policy action is limited when inflation remains above the target level. </p>.<p>In a situation in which consumption has taken a “severe shock” and production of goods and services has declined, the necessary push to the economy has to come from the government. The report has noted that the fiscal gains achieved in the previous two years have been lost in the current year and the targets set in this year’s Budget have become all the more challenging. But the only means to tackle the slowdown is to increase public expenditure and to put more money in the hands of consumers. Public funding of major infrastructure projects can stimulate private investment. The prolonged lockdown and the resulting loss of economic activity has affected all sectors and caused income losses among all classes. But the poorer sections have been more affected than white-collar employees, who have options like online working. So, the major requirement for economic revival now is to put more money in the hands of the largest number of people possible and increase their spending power. </p>.<p>The report has underlined the role of private consumption in driving the economy when the impact of Covid-19 reduces. Improvement of credit flows is an important requirement for the revival of the economy. Banks have failed to ensure this. The report has noted that “banking has to be liberated from the risk aversion that is impeding the flow of credit to the productive sectors of the economy and undermining the role of banks as the principal financial intermediaries in the economy.” This needs to change and banks need to open the credit taps and lower interest rates.</p>
<p>The Reserve Bank of India’s annual report, released on Tuesday, presents a bleaker picture of the economy for the current financial year than had been predicted till now. It has warned that “more protracted spread of the coronavirus pandemic, deviations of the monsoon from the predicted normal rains and global financial market volatility” are key downside risks to growth. The contraction will be severe, and it will take much time to regain even the slow growth of the months preceding Covid-19. The lockdown has badly hit consumption. Since the situation is still evolving, RBI has refrained from estimating how much the economy will contract. The report noted that the uptick in the economy noticed in June after the lockdown was partially lifted in some areas has been lost after the re-imposition of restrictions in July and August. It hopes to see a turnaround only in early 2021, when inflation, too, which is above the comfort level now, may ease. The RBI’s space for monetary policy action is limited when inflation remains above the target level. </p>.<p>In a situation in which consumption has taken a “severe shock” and production of goods and services has declined, the necessary push to the economy has to come from the government. The report has noted that the fiscal gains achieved in the previous two years have been lost in the current year and the targets set in this year’s Budget have become all the more challenging. But the only means to tackle the slowdown is to increase public expenditure and to put more money in the hands of consumers. Public funding of major infrastructure projects can stimulate private investment. The prolonged lockdown and the resulting loss of economic activity has affected all sectors and caused income losses among all classes. But the poorer sections have been more affected than white-collar employees, who have options like online working. So, the major requirement for economic revival now is to put more money in the hands of the largest number of people possible and increase their spending power. </p>.<p>The report has underlined the role of private consumption in driving the economy when the impact of Covid-19 reduces. Improvement of credit flows is an important requirement for the revival of the economy. Banks have failed to ensure this. The report has noted that “banking has to be liberated from the risk aversion that is impeding the flow of credit to the productive sectors of the economy and undermining the role of banks as the principal financial intermediaries in the economy.” This needs to change and banks need to open the credit taps and lower interest rates.</p>
