RBI's promise on fuelling GDP growth

Reserve Bank of India (RBI) Governor Shaktikanta Das assured India Inc that the Central bank would not hesitate to step in and initiate more steps to fuel economic growth if warranted. Addressing members of an industry body on Monday, Das, however, underlined the need for enhancing investments into the infrastructure sector to re-ignite GDP growth.

Citing Niti Aayog projections, he mentioned that India would need around $4.5 trillion investments into its infrastructure by 2030. It is indeed good news that the Central bank would come out with more measures to spur growth. However, the RBI chief is not alone in giving such an assurance. Chief Economic Advisor Krishnamurthy Subramanian also made a similar statement in recent times. But given the way Covid-19 cases are rising across the country now, it is not easy to infuse life into the economy as it is likely to take much bigger dent than what has been estimated thus far. Further, there is no clarity yet as to how long this pandemic will last. So, it is too early to gauge the true impact of novel coronavirus on the GDP.

That is the reason why the RBI did not give any estimation of the impact on the GDP growth in its recent Financial Stability Report (FSR). The Central bank earlier said that India's GDP would slip into a negative zone in FY21 but did not specify the quantum of contraction. In FSR too, it did not indicate the number, but said that there would be significant downside risks to the economy in FY21 due to Covid-19. However, there may be some indications on the true trajectory of the economy when the RBI's Monetary Policy Committee (MPC) announces its bi-monthly monetary policy on August 6. It is widely expected that the apex bank will go for another 25 basis points cut in key repo rate. The rate cut decision and the extent of the cut will, however, depend on the macroeconomic signals.

Moreover, moratorium on loans announced for three months in March and subsequently extended by another three months, will come to an end on August 31. RBI may also take a call on whether it will extend this moratorium by another three months, go for a hybrid model or do away with it altogether. If it extends the relief by another three months, it could be construed that the economy would be heading for a bigger crisis. However, RBI may decide on the next course of action on the economy once Covid-19 reaches its peak in the country.

The Central government already announced Rs 20-lakh crore Atmanirbhar Bharat Abhiyan to support the Covid-hit economy. This package includes all the measures announced by RBI thus far. Barring a small chunk of this package, most of the other measures were aimed at improving the liquidity in the system. However, some measures have not yielded desired results because some of the extra credit given to MSMEs has found its way into stock markets as consumption demand has not picked up. So, RBI's new steps should focus on reviving the consumption demand, not on the liquidity. That way, it can fuel faster economic revival. Otherwise, the economy will take much longer to recover. That's not good for the country.