Reserve Bank of India governor Urjit Patel recently explained how financial events of 2017 will shape the country’s economy in the long run.
Here are four takeaways from his speech made at a conference hosted by the Center for Advanced Financial Research and Learning (CAFRAL).
The governor started off his speech by eulogising the Monetary Policy Committee’s role in bringing about fiscal stability while keeping in mind the objective of growth. He, however, warned that these were just early days.
On the fiscal front, Patel said the current account deficit (CAD) remained within “sustainable levels”, which he sees as a healthy sign for the country. But the numbers don’t stack up in this case. The CAD, in fact, rose to a four-year high this June. The CAD, which is the difference between inflow and outflow of foreign exchange, increased to $14.3 billion or 2.5% of the country’s economy.
He also said that fiscal prudence had brought down the debt-to-GDP ratio. The gradual lowering has coincided with Moody’s, an international rating agency, upgrading India’s credit rating a few weeks back. However, it is important to note that India’s debt-to-GDP ratio remains on the higher side at 69%. But the government has sounded out plans to tackle the plan. Media reports suggest that the finance ministry aims to reduce the debt ratio below 60% by 2022-23.
The central bank chief also pointed out that despite geopolitical upheaval and heightened volatility in financial markets, the country has witnessed a “sizeable” inflow of foreign investment.
Until recently, public sector banks (PSBs) were hobbled by bad loans, known as non-performing assets (NPAs). If media reports are to be believed, the average bad loans of public sector banks were over 75% of their net worth.
This spurred the central bank to play an active role in curbing the growing malaise in 2017. The governor, during the keynote speech, informed that the “risk-based supervisory process of the Reserve Bank” has been flagging errant banks whenever they notice any “risk in the balance sheet”. The 54-year-old economist also believed that the government’s plan to infuse Rs 2.11 lakh crore of capital into banks would harness the “growth impulse” of the country. He expected the banks to streamline its lending policy and make sure that the level of bad debt doesn’t hit the ceiling again.
There has been concern about India’s sluggish economic growth, especially this year. But Patel didn’t see any reason to worry. He said the economy had slowed down due to structural changes in the economy (read: GST and demonetisation), but didn’t see this problem to continue over the long-term. The RBI governor also felt the stronger economic performance in the second quarter of FY 2017 suggested that the “slowdown may well be bottoming out”.
Patel also pinpointed that the future will be better due to the liberalisation of foreign direct investment (FDI) policy, as evidenced by the record inflows to India this year.
Patel did have a word of caution though. He felt that accelerated globalisation in the last three-and-a-half decades had made India over-dependent on external markets. While he acknowledged that India has benefitted greatly from globalisation, he felt some buffers needed to be built to cushion future financial catastrophes in future.
The RBI chief said the best way to insulate the economy from global financial turmoil was to enhance foreign exchange reserves. Building a bigger reserve would, in his words, “prevent the risks” and not “threaten (the country’s) financial stability”. Just to give you a perspective, our forex reserves are sufficient enough to cover only 78.4% of external debt. Therefore, this makes our economy vulnerable to shocks and volatility in global financial markets.
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