Reforms Hold the Key To Reverse Slowdown, World Bank Tells India

The World Bank, in its Indian Development Update' Report on Indian Economy, exuded confidence that economic slowdown will open new opportunities for the country.

Reforms Hold the Key To Reverse Slowdown, World Bank Tells India

World Bank: In May 2020, World Bank had projected Indian economy to contract 3.2 per cent in FY20/21

India needs to continue with reforms to reverse the economic slowdown and put the economy back on a sound footing towards a 7-percent-plus growth path, the World Bank said in its 'Indian Development Update' Report on Indian Economy on Wednesday, and exuded confidence that the ongoing economic slowdown can open new opportunities for India.

The Covid-19 pandemic came at a time when the Indian economy was already in a state of deceleration. The real GDP growth had moderated from 7.0 per cent in 2017-18 to 6.1 per cent in 2018-19 and 4.2 percent in 2019-20. The pandemic made things worse for the Indian economy.

In May 2020, the World Bank had projected the Indian economy to contract by 3.2 per cent in FY20/21 and rebound slowly in FY21/22. 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," the report said. But with the emergence of further challenges in recent weeks, the bank may project a steeper contraction in its revised outlook in October, the report cautioned.

India can, however, seize this opportunity to get back on track onto the path of high growth, the World Bank pointed out. Multinationals are seeking greater diversification away from China and India can implement economic reforms to transform itself into an attractive destination. India can also explore new economic opportunities in digital technology, efficient retail, health-tech and ed-tech services,the bank said in its report. Leveraging these opportunities can provide new growth levers for the country, the report emphasized.

The report highlighted the timely initiatives already taken by the government and Reserve Bank of India, including monetary policy easing, liquidity injections and enhanced social protection measures. It also drew attention to the reforms initiated for the agricultural and MSME (micro, small and medium enterprises) sectors.

Continuing with the reform theme, the World Bank outlined some major reform measures for India:

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Maintain financial sector stability: Increased risks call for enhanced focus on the part of RBI on risk-based regulation and supervision. The central bank needs to further improve financial sector safety nets, closely monitor the liquidity and capital buffers; and strengthen the regulatory and institutional framework for debt restructuring and insolvency in order to deal with a rise in non-performing loans.

Reform the Non-Banking Finance Company (NBFC) sector: The NBFC sector needs to be reformed to support its role in channeling credit to the real sector. It is important to institutionalize the recently launched liquidity schemes for NBFCs, and continue strengthening risk-based regulation and oversight of NBFCs.

Deepen capital market reforms: Mature capital markets are critical to ensure the availability of long-term finance. The government should continue to ease demand and supply side constraints, and revisit investment guidelines for institutional investors to attract long-term finance and address asset liability issues.

Build greater synergy between fintechs and MSMEs: Fintechs have played a crucial role in accelerating financial inclusion in India, but a lot more can still be done with the right policy push. With their lower origination costs and turnaround times vis-a-vis traditional lenders, the fintech lenders can help borrowers such as MSMEs to restart their business activities after the lockdown.

Simplify lending norms and focus on priority-sector lending: The government has been consolidating public sector banks and strengthening their corporate governance norms. The logical step is to gradually scale back statutory requirements for state banks to provide liquidity and strengthen priority-sector lending policy. In the long run, there could even be a mix of private capital injections into state banks and full privatization in select cases.