RBI annual report: Policy resolve gives confidence despite macro challenges

The report stands out for its vast coverage, superior analysis, and key recommendations for policy priorities.

Against the backdrop a severe global pandemic, the RBI’s Annual Report, released Tuesday, remains an important document that laid down the central bank’s assessment of the Indian economy and the various policy initiatives. Maintaining a long tradition, the report stands out for its vast coverage, superior analysis, and key recommendations for future policy priorities. This article attempts to briefly discuss a few such issues; admittedly, this set of points is far from being an exhaustive one.

Growth markedly weak; rural economy in better shape

As regards near term growth, the report explained that after a quick uptick in May and June, activity indicators have lost momentum in subsequent months, primarily due to re-imposition of partial and localised lockdowns, suggesting that contraction in growth looks set to prolong during Q2 of 2020-21. While the report is forthright to flag the anaemic investment demand and the unprecedented dent in consumer confidence, the central bank rightly indicated that rural demand has fared better. While muted wage growth has been a headwind, the RBI expects government’s rural focused employment schemes to provide a fillip to rural incomes, as government consumption is expected to continue pandemic-proofing of demand in the near term.

Strong reform ideas

The role of fiscal spending in providing cushion to the pandemic-hit economy is widely recognised. However, the central bank report has aptly flagged the challenges for the authorities given the limited fiscal headroom – for the central government, and further acutely for several state governments – for continuing support to aggregate demand. The result of such a backdrop is often a major squeeze and cuts in capital expenditure, that otherwise boost long-term growth potential.

While the large overhang of debt and contingent liabilities incurred during the pandemic are major challenges for the fiscal roadmap, the RBI most pertinently flagged that a credible consolidation plan specifying action points for reduction of debt and deficit levels over the medium term is the key to earn confidence and acceptability.

In that context, it is significant that the apex bank mentioned that targeted public investment funded by monetisation of assets in steel, coal, power, land, railways and privatisation of major ports by central and state governments under an independent regulator can be the way forward to revive and crowd in private investment, and apex authorities such as the GST Council can be set up in respect of a number of areas such as land, labour and power to drive structural reforms. The RBI emphasised that such bodies could include speedier implementation of the national infrastructure pipeline alongside steps to improve business sentiment and the environment for investment over time, that can spread the benefits of development widely in the society.

Growth in agriculture

It is interesting to note the RBI also underscoring that going forward, shifting the terms of trade in favour of agriculture is the key to generating positive supply responses in agricultural production. Experience shows that in periods when the terms of trade remained favourable, value addition in agriculture has increased significantly. Hitherto, the main instrument of incentive has been minimum support prices, despite price incentives being costly, inefficient and even distortive. The RBI indicated that India has now reached a stage in which surplus management has become a major challenge. The priority is to move to policy strategies that ensure a sustained increase in farmers’ income alongside reasonable food prices for consumers.

Financial inclusion, credit to MSMEs remain priorities

Furthermore, the central bank report acknowledged that while credit delivery to priority sector in absolute terms have shown an uptick, there was decline in priority sector Lending (PSL) as percentage of adjusted net bank credit (ANBC) or credit equivalent of off-balance sheet exposures (CEOBE). However, PSL certificates trading showed a robust growth and banks have met their target for agriculture credit flow indicating sustained rural lending even in the backdrop of the pandemic. The annual report highlights the various initiatives taken in order to further boost the PSL as well as the credit to MSME such as reviewing PSL guidelines and interest subvention scheme revision. Inclusion of items such as monitoring implementation of recommendations of the “Expert Committee on MSMEs” and “Internal Working Group to Review Agriculture Credit”, and review of guidelines of PSL in 2020-21 agenda items indicates efforts to support rural demand.

To further the financial inclusion, payment banks have been included under the Lead Bank Scheme. Rightly recognizing the role of Business Correspondents (BC) to improve financial inclusion, the central bank introduced frameworks and training programs to strengthen the overall BC structure. The annual report recognised the role BCs played amidst the pandemic ensuring that banking services were available to the last mile of the country and that credit and cash was reaching the needy. Further identifying digital channels as another important medium to bring about sustained financial inclusion, the central bank, in its report flagged numerous focused measures to deepen the digital payment ecosystem. The report also noted that banks have also been incentivized through various measures so that they also aid to the financial inclusion through sustained credit delivery even during these unprecedented times.

Focus on financial literacy encouraging

Identifying the key role played by financial literacy to drive financial inclusion, the report noted that a major take-away from its mid-line survey was that active participation i.e. face-to-face meeting or training yields a better result both for financial literacy as well as increasing use and uptake of products. Further, it is encouraging to note the key role that the central bank has played, with initiatives such as centralized mass media campaigns, Financial Literacy Week and National Strategy for Financial Education, to realize the vision of a financially aware and empowered India.

Overall, the report is a candid exposition of the markedly challenging macro backdrop and the dent in consumer and business confidence in the near term. Nevertheless, the RBI report strongly reinforces the commitment of policymakers not only in providing immediate support to the pandemic-hit economy, but also not to lose focus on a number of key long-term priorities, which continues to provide a strong source of confidence despite the current challenging times.

(The author is Chief Economist & Head of Research in Bandhan Bank. Views are personal. With assistance from Rahul Singh and Soumik De.)