By: Saugata Bhattacharya, Senior Vice-President, Business And Economic Research, Axis Bank
A significant part of the mandate in the last general election plausibly appears to have been for low and stable inflation as well as jobs. To implement these objectives swiftly, the prime minister emphasised speed, scale and skill, inter alia in the institutional mechanism responsible for implementation.
A three pronged approach is envisaged in the Economic Survey recommendations for improving India’s long-term economic prospects, as a means of achieving the objectives in a sustained manner. First, an ecosystem of low and stable inflation. Second, fiscal consolidation through tax and expenditure reforms. Third, appropriate legal and regulatory frameworks for a market economy. The Survey presents nicely crafted and coherent measures to address the multiple challenges.
One of these challenges has been the sharp contraction of financial savings of households, increasing India’s dependence on overseas funds, a large part of it short term, consequently increasing our vulnerability to global volatility. To fund this capex, domestic financial savings need to increase, and cost of funds to fall to increase commercial viability of projects. Financial sector reform is crucial for these outcomes.
While banks are the largest group, the need to deepen financial savings will need multiple intermediaries, say, to increase inclusion, increase longterm savings, credit to SMEs and so on. Capital markets need to develop to allow banks to hand off risks and take fresh credit exposures. The encompassing institutional framework suggested in the FSLRC reports and reinforced by other committees, will provide the enabling environment for much of this change. In addition to creating a more competitive domestic financial market, India has the potential to emerge as a significant international financial centre. Among other benefits, this will provide India’s investors access to the global capital pool, while mitigating the frictions which increase the cost of this capital.
The foundation for sustained high growth is low and stable inflation. Coordinated fiscal, monetary and industrial policy is needed to provide the enabling environment. Among the multiple strategies explored, we focus on the monetary policy framework, together with financial sector reform, which is crucial for giving traction for stabilising inflation. While many aspects of the framework are already well defined, starting from the Urjit Patel Committee reports and in subsequent actions and clarifications from RBI, many aspects will need to be harmonised with financial sector reform and the proposed FSLRC framework. RBI has already taken steps to improve transmission of monetary policy, including development of term money markets, which is the first step towards liquid debt markets. Innovative inflation hedging savings products will gradually incentivise financial savings.
Will the Budget initiate measures to implement these recommendations over the next 2 to 3 years, the time line indicated? While there has often seemed a disconnect between the Survey contents and Budget provisions in the past, some critical initiatives have in fact been gradually implemented.
The most evident was the implementation of direct cash benefit transfers, and rationalisation of petroleum products prices. Among the multiple reform measures recommended, financial sector reform is already well advanced and amenable to relatively quick change. Given the agenda and implementation capability of the current government, there is reason for optimism in expecting the start of decisive actions in building the foundation for India’s potential.
(The views are the author’s own and do not necessarily reflect those of the institution to which he is affiliated)
A significant part of the mandate in the last general election plausibly appears to have been for low and stable inflation as well as jobs. To implement these objectives swiftly, the prime minister emphasised speed, scale and skill, inter alia in the institutional mechanism responsible for implementation.
A three pronged approach is envisaged in the Economic Survey recommendations for improving India’s long-term economic prospects, as a means of achieving the objectives in a sustained manner. First, an ecosystem of low and stable inflation. Second, fiscal consolidation through tax and expenditure reforms. Third, appropriate legal and regulatory frameworks for a market economy. The Survey presents nicely crafted and coherent measures to address the multiple challenges.
One of these challenges has been the sharp contraction of financial savings of households, increasing India’s dependence on overseas funds, a large part of it short term, consequently increasing our vulnerability to global volatility. To fund this capex, domestic financial savings need to increase, and cost of funds to fall to increase commercial viability of projects. Financial sector reform is crucial for these outcomes.
While banks are the largest group, the need to deepen financial savings will need multiple intermediaries, say, to increase inclusion, increase longterm savings, credit to SMEs and so on. Capital markets need to develop to allow banks to hand off risks and take fresh credit exposures. The encompassing institutional framework suggested in the FSLRC reports and reinforced by other committees, will provide the enabling environment for much of this change. In addition to creating a more competitive domestic financial market, India has the potential to emerge as a significant international financial centre. Among other benefits, this will provide India’s investors access to the global capital pool, while mitigating the frictions which increase the cost of this capital.
The foundation for sustained high growth is low and stable inflation. Coordinated fiscal, monetary and industrial policy is needed to provide the enabling environment. Among the multiple strategies explored, we focus on the monetary policy framework, together with financial sector reform, which is crucial for giving traction for stabilising inflation. While many aspects of the framework are already well defined, starting from the Urjit Patel Committee reports and in subsequent actions and clarifications from RBI, many aspects will need to be harmonised with financial sector reform and the proposed FSLRC framework. RBI has already taken steps to improve transmission of monetary policy, including development of term money markets, which is the first step towards liquid debt markets. Innovative inflation hedging savings products will gradually incentivise financial savings.
Will the Budget initiate measures to implement these recommendations over the next 2 to 3 years, the time line indicated? While there has often seemed a disconnect between the Survey contents and Budget provisions in the past, some critical initiatives have in fact been gradually implemented.
The most evident was the implementation of direct cash benefit transfers, and rationalisation of petroleum products prices. Among the multiple reform measures recommended, financial sector reform is already well advanced and amenable to relatively quick change. Given the agenda and implementation capability of the current government, there is reason for optimism in expecting the start of decisive actions in building the foundation for India’s potential.
(The views are the author’s own and do not necessarily reflect those of the institution to which he is affiliated)
