India needs to maintain reform momentum to reverse current economic slowdown, the World Bank said in a report on Wednesday.
"Implement critical reforms in key areas such as health, labour, land, skills and finance to come out stronger from the impact of the Covid-19 pandemic. These reforms should aim at enhancing productivity of the Indian economy and spur private investments and exports," said the India Development Update, a biannual flagship publication of the World Bank that takes stock of the Indian economy.
The fiscal deficit of the Central government is likely to increase to 6.6 per cent of GDP in FY20/21 and is expected to remain elevated at 5.5 per cent in the following year, it said. The World Bank projections in this report are from May 2020.
"Assuming that the states’ deficit is contained within 3.5-4.5 per cent of GDP, the combined deficit could rise to around 11 per cent in FY20/21," the report said.
While there is a significant level of uncertainty around the projections, the general government debt-to-GDP ratio is projected to peak at around 89 per cent in FY22/23 before gradually declining thereafter.
The outlook comes predicated with several downside risks. "These risks include the virus continuing to spread; a further deterioration in the global outlook; and additional strains projected on the financial sector. Keeping these factors in mind, a steeper contraction may be projected in the revised outlook that will be available in October 2020.," the report said.
Besides the immediate relief and recovery measures, the government has announced significant reform measures for agriculture, education, public sector, and micro, small and medium enterprises. The report says furthering such reforms will help put the economy back on a 7 percent growth path.
i). Strengthening fiscal reforms
In order to instill fiscal discipline in handling COVID-19 related implications, the report suggests India may:
Reassess subsidies to leverage any scope for efficiency gains;
Evaluate how much can be borrowed domestically and externally;
Generate nontax revenues more aggressively; and
Link the repayment of new borrowings to disinvestment receipts.
ii). Financial sector reforms
To put the financial sector on a sounder footing, the report identifies specific areas of reform. These include:
Financial sector stability: The RBI’s continued focus on risk-based regulation and supervision will be important as the temporary forbearance measures are phased out. Further strengthening of financial sector safety nets; close monitoring of liquidity and capital buffers; and regulatory and institutional framework for debt restructuring and insolvency could help deal with any spike in non-performing loans.
Reforms in the Non-Banking Finance Company (NBFC) sector: Reforms in the NBFC sector are needed to support its role in channeling credit to the real sector. In order to diversify the funding base and to strengthen the NBFC sector, recently launched liquidity schemes for NBFCs could be institutionalized. It would also be important to continue strengthening risk-based regulation and oversight of NBFCs.
Deeper capital market reforms: Deeper capital markets are critical for increasing the availability of long-term finance. The report calls for the government to continue its focus on easing demand and supply side constraints, and to build on recent initiatives. The report also suggests revisiting investment guidelines for institutional investors to crowd in long-term finance and address asset liability mismatch issues.
Role of fintech: The fintech sector has the potential to close the gap in access to financial services and help firms, especially MSMEs, access much needed credit and liquidity. The report suggests mainstreaming fintech to reach firms faster and at a lower cost.
Moving to a more strategic public-sector footprint: Recent efforts including consolidation of public sector banks and strengthening of corporate governance are encouraging steps towards a more strategic public sector footprint. Moving forward, gradually scaling back the statutory requirement for state banks to provide liquidity, as well as the priority-sector lending policy, will help reduce market distortions.