Debt reduction over mid-term key for India's growth prospects , central bank says

Reserve Bank of India logo is seen at the gate of its office in New Delhi
A Reserve Bank of India (RBI) logo is seen at the gate of its office in New Delhi, India, November 9, 2018. REUTERS/Altaf Hussain

MUMBAI, April 29 (Reuters) - India's economic recovery is still dependent on stimulus measures, but cutting debt is essential to ensure sustained growth over the medium term, the Reserve Bank of India (RBI) said in a report on Friday.

India should aim to reduce general government debt to below 66% of gross domestic product (GDP) over the next five years, the central bank said. Debt is currently around 90% of GDP.

"The debt path over the next five years, even under the best-case scenario, may further squeeze fiscal space unless strategic policy efforts covering both taxes and expenditure aim at targeted consolidation," it said.

Fiscal consolidation is needed to allow the private sector to sustain growth momentum and mitigate the potential drag on growth from fiscal activism once the economy fully recovers, it explained.

The report said new risks to growth and inflation had emerged from the war in Ukraine and the normalisation of U.S. monetary policy.

In his forward to the report, however, RBI governor Shaktikanta Das said resilience in sectors such as agriculture, information technology services, exports, digitalisation and renewable energy during the pandemic provided confidence that the Indian economy can stage a strong comeback.

The report said that while both private consumption expenditure and investment had marginally surpassed their respective pre-pandemic levels in 2021/22, there was a need to boost growth momentum to compensate for lost output.

"The capital expenditure push in the Union Budget for 2022/23 can provide the much needed support to achieve sustained high growth by enhancing productive capacity, crowding in private investment and strengthening aggregate demand," it said.

The report highlighted that price stability is a precondition for strong and sustainable growth and called for supply-side measures to address inflationary pressures in the economy.

India's retail inflation accelerated to near 7% year-on-year in March, its highest in 17 months and above the upper limit of the RBI's tolerance band for a third straight month. read more

Surplus liquidity within 1.5% of the banking system's total deposits does not pose a significant risks to inflation, the report said.

Reporting by Swati Bhat Editing by Mark Potter

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