Two independent reports, one by World Bank and the other by RBI, provide an insight into the economic policy pathway NDA needs to choose next year. The key lesson is that government must eschew a short-term fix like piling on debt to boost the economy. The World Bank has observed that debt in emerging economies at the end of an eight-year surge was a record $55 trillion by end 2018. The consequence could be what RBI has termed the ‘cobra effect’, where solutions worsen the problem.
RBI’s biannual financial stability report, released last week, had sobering news. Bad loans, which were 9.3% of total lending in September, may increase to 9.9% in a year on account of the fragile macroeconomic scenario and weak credit growth. This forecast should rule out the option of using government borrowing to boost economic growth. Waves of debt have unhappy consequences. Despite loose monetary policy for a year, growth in credit offtake from banks slowed down between March and September. The reluctance to invest is not on account of prevailing interest rates.
With loose monetary and fiscal policy unable to meaningfully influence economic momentum, the Modi government must hammer out a new reform blueprint. Animal spirits are unleashed when investors are optimistic about the future. From a political standpoint, things couldn’t be better. We have a majority government for the second time in a row. The Centre’s focus must now shift to implementing a full package of factor market reforms. All political parties have a stake in it as a sharp slowdown in tax collections on account of weak demand hurts every state government. If the Centre doesn’t act and states don’t co-operate then India is in for another lost decade, worse than the 2010s which was already worse than the go-go 2000s.
Source: timesofindia.indiatimes.com