Why in news?
The Reserve Bank of India (RBI) has released its annual report.
What are RBI’s assessments?
- The RBI’s assessment of the economic landscape and its prognosis for near-term prospects posit a stark picture of:
- Demand hollowed out by the severe shock to private consumption,
- Public finances strained by the imperative of funding mitigation measures,
- Anaemic appetite for investment among corporates and
- Credit-flow-impeding risk aversion among bankers.
- The RBI said that the Covid-19-induced economic contraction is almost certain to extend through the July-September period.
- Reimposition of lockdowns in the country in July and August damped the tentative revival in momentum seen in the preceding two months.
- The RBI said that several recent high-frequency indicators pointed to an unprecedented retrenchment in activity.
- It noted that the consumption which survived the shock was now manifesting.
- It said so as essential spending with services including transport and hospitality are almost completely eviscerated.
What would the governments do?
- The Central government has attempted ‘pandemic proofing’ demand by increasing its net revenue expenditure by a third in the first quarter.
- However, it is likely to find itself strapped for resources in the coming months.
- So, it would have little leeway to continue to undergird momentum.
- States are expected to find their finances so tightly squeezed as to have to cut capital spending.
What does the RBI suggest?
- The RBI suggests that the government should help crowd in private investment through targeted public investment.
- This public investment could be funded by monetising assets in steel, coal, power, land and railways.
- But the private companies are too highly in debt and keen to use gains from the government’s corporate tax rate cut to repay loans.
- So, it is hard to see the government raising much out of its privatisation efforts.
What could be done?
- The Centre may opt to marshal its meagre resources more prudently.
- It should wait for the curve of infections to start flattening before committing to any further stimulus spending.
- A revival will ensue only once consumers regain confidence to go out and spend.
Source: The Hindu
