11 JUL,2022 | MEDC
To take an optimistic perspective, India's glass is half-full. Inflation may be above the comfort level of the RBI, but there are tangible reasons why our economy could still navigate a soft landing. However, there are external factors like an escalation of the war in Ukraine and increased sanctions against Russia, which will have a disproportionate impact on the vulnerable sections of society within the country, in the form of rising poverty and increasing inequality. These factors have both long-term and short-term socioeconomic consequences which need to be dealt with astutely.
The international monetary system is at the threshold of major change from a combination of economic, geopolitical and technological forces. Regarding financial sector stability, the continuous evolution of global markets - not least because of the dizzying pace of technological innovation - has introduced new vulnerabilities and risks demanding enhanced regulatory vigilance. Here RBI's stand on crypto assets is laudable. Most digital assets cannot be compartmentalized into traditional categories, making their valuation that much harder. The crypto industry still has a lot of growing up to do, and until it reaches a certain level of accountability, RBI is right in viewing it with skepticism. Financial sector stability is a key factor affecting India's growth prospects, both long-term and short-term.
Fiscal consolidation is increasingly important. Our situation is not irredeemable. Apart from rationalizing the tax system, what is urgently needed is a medium-term roadmap for our economy acknowledging the difficult times we are in, and setting out the policy initiatives addressing these challenges. This should be attempted not just at the Central, but even at the state level. Going ahead, we need to be clear about whether our economy will be export driven or Atmanirbhar or both. This clarity matters for developing the optimal fiscal policy instruments for tomorrow.
India's forex reserve position is comfortable at almost $ 600 billion. However, as we run current account deficits for the most part, accumulated reserves become less reliable. Uncertain global economic conditions can lead to sudden outflows, a sharp currency depreciation and an adverse impact on domestic inflation, as we are a net commodity importer. India’s trade deficit has already jumped to a record $ 25.63 billion in June 2022, as against $ 9.61 billion in June 2021. Prudence enables economic growth, and RBI needs to encourage capital inflows when most of India's key macroeconomic indicators are still not in the red.
Good governance is the key to dealing with growth challenges. That manifests itself in several ways: by how the national budget is formulated and presented, by the degree of independence the Central Bank possesses, by the ease of doing business in the economy, by the data-protection laws of the land, and whether there is a commitment to declaring the assets of key public figures and regularly publishing audits of all large companies – both in the public and in the private sector. India has made progress on each of these indicators, but we cannot afford to rest. Now when the world faces multiple challenges – the pandemic, the Ukraine crisis, and climate change – the need for good domestic governance has become even more necessary. It is the sine qua non for ensuring sustained socioeconomic growth.
*Picture Credit: Google