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THE GIST of Editorial for UPSC Exams : 27 August 2020 Sobering assessment: On RBI’s annual report (The Hindu)

Sobering assessment: On RBI’s annual report (The Hindu)

Mains Paper 3:Economy
Prelims level: Revenue expenditure
Mains level: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

Context:

The impact of budget deficits on private investment is an unsettled issue. If budget deficits are to be financed by borrowing, interest rates must rise so that capital markets can reach equilibrium. High interest rates, in turn, result in a decreased investment, hence the crowding-out effect. On the other hand, if budget deficits help boost economic growth, investors could become more optimistic and decide to invest more, hence the crowding-in effect. Finally, if an increase in deficits due to tax cuts today is to be matched by tax increases in the future, interest rates and investment may not change. In this paper we employ cointegration analysis and data from nine European countries to test the impact of budget deficits on private investment.
Three weeks after its monetary policy committee decided to hold fireon interest rates amid accelerating retail inflation, the RBI has forecast more pain for the economy.

Worrying future:

Its assessment of the economic landscape and its prognosisfor near-term prospects posit a stark picture.
Demand being hollowed out by the severe shock to private consumption, public finances strained by the imperative of funding mitigationmeasures, anaemicappetite for investment among corporates and credit-flow-impeding risk aversionamong bankers, to name but a few.
The COVID-19-induced economic contraction that manifested itself in the fiscal first quarter, is now almost certain to extend through the July-September period, the RBI said in its Annual Report.
RBI observed that the “reimposition or stricter imposition of lockdowns” in different parts of the country in July and August had mainly contributed to damping the tentative revival in momentum seen in the preceding two months,
It said several recent high-frequency indicators pointed to an unprecedented retrenchmentin activity.
Noting that the services sector has been a prime mover of the Indian economy, the central bank flagged the fact that whatever consumption had survived the shock was now manifesting as essential spending with services including transport and hospitality almost completely eviscerated.

“Crowd in” Private investment:

The Central government, which has gamely attempted ‘pandemic proofing’ demand by increasing its net revenue expenditure by a third in the first quarter, is, however, likely to find itself strapped for resources in the coming months.
As a result, it would have little leewayto continue to undergird momentum.
States too are expected to find their finances so tightly squeezed as to have to cut capital spending.
In its prescription to overcome the funds crunch, however, the central bank appears to run into a contradiction.
The RBI suggests that the government should help “crowd in” private investment through targeted public investment that could be funded by monetising assets in steel, coal, power, land and railways.
But given that private companies have been either too highly in debt and therefore keen to use gains from the government’s corporate tax rate cut to repay loans, or loathto raise capital spending when saddled with excess capacity, it is hard to see the government raising much out of its privatisation efforts.
Ultimately, as Expenditure Secretary has acknowledged, the Centre may opt to marshal its meagre resources more prudently and wait for the curve of infections to start flattening before committing to any further stimulus spending.

Conclusion:

A revival will ensueonly once consumers regain confidence to go out and spend. And that, as of now, seems a fair distance away.
The RBI’s annual report makes clear there is more pain in store for the economy.
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Prelims Questions:

Q.1)With reference to the Atal Bimit Vyakti Kalyna Yojna, consider the following statements:

1. Micro Units Development and Refinance Agency Ltd. (MUDRA) is implementing the Atal Bimit Vyakti Kalyna Yojna.
2. Recently the scheme got extended for one more year upto 30th June next year.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: B