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Focus on fundamentals, inclusive growth and structural reforms: RBI Governor to govt

The importance of broad-based prosperity has been well recognised for a long time and there is a consensus on the need to ensure that the benefits of economic growth reach the populace at large, he said.

By: ENS Economic Bureau | Mumbai |
January 8, 2020 3:15:02 am
RBI, reserve bank of india, Shaktikanta Das, indian express RBI Governor Shaktikanta Das. (File photo, source: Reuters)

In an oblique advice to the government at a time when the economy is facing severe headwinds, RBI Governor Shaktikanta Das on Tuesday said there is a need to focus on the fundamentals and create an ecosystem that facilitates inclusive growth with structural reforms as the underlying theme.

“While there is consensus on the need to achieve a more egalitarian social and economic order globally as well as within a country, it is equally important to focus on the fundamentals and create an ecosystem that facilitates greater inclusion. The underlying theme has to be structural reforms,” Das said, ahead of the Union Budget which is less than a month away.

The importance of broad-based prosperity has been well recognised for a long time and there is a consensus on the need to ensure that the benefits of economic growth reach the populace at large, he said. “As an idea and a policy objective, it is similar to the concept of inclusive growth,” Das said in his opening remarks at the third Suresh Tendulkar Memorial Lecture by Tharman Shanmugaratnam, Senior Minister, Republic of Singapore.

GDP growth in the September 2019 quarter had plunged to a six-year low of 4.5 per cent, the lowest since the three months ended March 2013. On December 5, 2019, the Reserve Bank of India (RBI) slashed the real GDP growth for 2019-20 downwards from 6.1 per cent in the October policy to 5 per cent, saying that it can even go down to 4.9 per cent.

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The ongoing economic slowdown seems to have hit the corporate sector badly, with companies reporting a whopping 54.3 per cent fall in net profit for second quarter ended September 2019 as “demand conditions facing the manufacturing sector weakened, with contraction in nominal sales that became broad based across industries”, according to data released by the RBI.

The fall in profits was steep as these companies had posted a 41.7 per cent rise in profits in September 2018. As Mumbai is the commercial capital, the slowdown in the economy has affected corporates based in Maharashtra.

According to Das, the mandate given to the RBI on maintaining price stability, financial stability and economic growth is not only important from macroeconomic perspective, but also for the objective of inclusive growth. “Persistently high inflation adversely impacts the economy’s allocative efficiency and impedes growth. It also contributes to a worsening of income distribution by depreciating the real income of the poor.”

“Similarly, high growth with financial stability augurs well for inclusive growth. High growth can bring inclusiveness in the process of wealth creation and its spread effect. Higher growth also improves tax-GDP ratio which enhances the resource availability with the government to undertake social and infrastructure expenditure,” the RBI Governor said.

A sound financial system with healthy banks and NBFCs can play an important role in meeting the credit requirements of the bottom of the pyramid. “Therefore, we have been focussing on strengthening regulation and supervision to develop a robust framework of financial stability where banks and NBFCs are able to fulfil expectations of the society,” he added.

In the area of agricultural market reforms, there is consensus that improvement in the supply chain could become a major channel for promoting inclusive growth, as this can increase the share of farmers in retail prices paid by the consumers, Das said.

The average share of farmers in retail prices of major primary food items varies between 28-78 per cent. It is lower for perishables and higher for non-perishable items. “Higher share of retail prices going to farmers augurs well for the rural economy, which in turn, could help sustain domestic demand. Initiatives towards wider rural roads network, better communication facilities for faster exchange of information and easier access to micro credit will contribute to better price realisation for the farmers,” Das said.

Das said the National Strategy for Financial Inclusion (2019-24) prepared by the RBI has been approved by the Financial Stability and Development Council (FSDC).

“It sets forth the vision and key objectives of financial inclusion policies in India and aims to provide access to formal and affordable financial services; broaden and deepen financial inclusion; and promote financial literacy and consumer protection,” he said.

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