MUMBAI: The deep economic injuries inflicted by the pandemic will take 13 more years to heal, according to a new RBI report. “India is expected to overcome Covid-19 losses in 2034-35,” says the Report on Currency and Finance for 2021-22: Revive and Reconstruct released on Friday.
The report estimates the output losses during the pandemic years of FY21, FY22 and FY23 at Rs 19.1 lakh crore, Rs 17.1 lakh crore and Rs 16.4 lakh crore, respectively. The pre-Covid trend growth rate for the economy works out to a compounded annual growth rate of 7.1% from FY13 to FY17, excluding the slowdown years from FY18-20.
“Taking the actual growth rate of (-)6.6% for 2020-21, 8.9% for 2021-22 and assuming a growth rate of 7.2% for 2022-23, and 7.5% beyond that, India is expected to overcome Covid-19 losses in 2034-35,” the report notes.
While the economic engine has weakened, the report says price stability and a reduction in government debt could help achieve growth. It pegs 6.5-8.5% as the feasible range for GDP growth in the medium term.
Report on Currency and Finance, or RCF, is recommendatory in nature. The paper comes in the wake of the recently released minutes of RBI’s Monetary Policy Committee meeting of April 6-8, which left a key policy rate unchanged at 4%. All six MPC members stressed on withdrawal of accommodation to rein in inflation, which for three straight months has remained above RBI’s upper tolerance band of 6%.
RCF underscores that the first step toward growth is timely rebalancing of monetary and fiscal policies. First, the large surplus liquidity overhang has to be withdrawn — every percentage point increase in surplus liquidity above 1.5% of net demand and time liabilities causes average inflation to rise by 0.6% in a year.
“Monetary policy has to assign priority to price stability as the nominal anchor for the future growth trajectory,” it says. Also, growth is at risk once general government debt exceeds 66% of GDP. “Reducing debt to more sustainable levels that are compatible with the growth trajectory being envisaged for a post-pandemic Indian economy will be daunting. Even under best possible macroeconomic outcomes, general government debt may not decline below 75% of GDP over the next five years,” the report adds.
India’ debt to GDP ratio is expected to be 87.4% in FY22.
Challenges to growth
General govt debt is unlikely to decline to below 75% of GDP in the next 5 years. If the debt remains above 66% of GDP, it could dampen growth.
Large surplus liquidity, which helped ease financial pain during the pandemic, needs to be withdrawn in a calibrated manner. This is because surplus liquidity will push up inflation.