A clarion call for government action

A clarion call for government action

The Reserve Bank of India’s (RBI) annual report says the economy’s woes call for strong medicine. While it acknowledges that fiscal constraints would reduce budgetary contributions to gross fixed capital formation, it also asserts that public funding in mega infrastructure projects is the only way to crowd in private investment and revive sustainable growth. It calls for urgent cleaning up of the mess in the power sector, active steps to make the debt market vibrant and reforms to improve the ease of business. In calling for improvement in ease of doing business, RBI indirectly dismisses the official claim that things have improved dramatically on this front.

The call to raise public investment, while recognising fiscal constraints, leaves a couple of options. One, public enterprises and funds such as the National Investment and Infrastructure Fund step up their investment role substantially. Two, monetise existing assets owned by the State and fund new large infrastructure projects. The RBI report specifically suggests monetising assets in steel, power, coal, land and railways, and privatisation of ports. Its suggestion to set up a committee to review the experience of GST and make improvements in structure, implementation and detection of avoidance and evasion is well worth acting on. The suggestion that bonds should play a bigger role in financing investment is well-taken, but RBI needs to do its bit to make this possible, such as removing legal obstacles to netting of exposures to the same counterparty.

The thrust on rebooting exports is unexceptionable. However, its recommendations on the electronics sector fail to take into account the sector’s role as a component of strategic capability and the need to develop deep capability to the level of technological autonomy.

Overall, the RBI’s report, confessing as it does the limits of monetary policy efficacy, should serve to focus the government’s mind on the role of State action, not limited to budgetary expenditure, in reviving growth. Large investments now will elevate growth and bring down debt-GDP ratios. The time to act is now.