private-investment-missing-in-action-rbi-article

Context: Only private investment is ”missing in action” at a time when all engines of aggregate demand are starting to fire to boost economic growth, according to a Reserve Bank article. 

  • Private investment, from a macroeconomic standpoint, is the purchase of a capital asset that is expected to produce income, appreciate in value, or both generate income and appreciate in value.
  • A capital asset is an item that you own for investment or personal purposes, such as stocks, bonds or stamp collections. When you sell a capital asset, you earn a capital gain or a capital loss, depending on the price
  • It is simply property that is not easily sold and is generally purchased to help an investor to generate a profit. Examples of capital assets include land, buildings, machinery, and equipment. 

Key points of RBI article

Growth

  • The economy is expected to stage a V-shape recovery in the next fiscal and record double-digit growth.
  • The Indian economy is estimated to contract by 8 percent during the current financial year on account of the impact of the COVID-19 pandemic. 

Inflation

  • Inflation positive: With pulses production 6 per cent higher than a year ago, inflationary pressures on the food front will be down.
  • Core inflation will need attention.
  • Disproportionately high excise duties on petroleum products is due to the state of public finances.

Challenges:

  • Poor credit offtake: Bank credit growth, which had already started decelerating in 2019-20, experienced a further setback in 2020-21 in the wake of the pandemic. 
  • It is due to economic slowdown coupled with the COVID-19-induced lockdown.
  • However, contraction in credit to large industries and infrastructure remains a cause of concern.
  • Owing to the stressed assets in large industries, there was a general reluctance on the part of bankers to lend to these industries, with the problem getting compounded by the pandemic.
  • Stimulus and finances: Fiscal policy authorities face the challenges  of stimulating the economy and the ‘hard place’ of ensuring sustainable finances.

Govt. initiatives:

  • The Reserve Bank has taken several measures to facilitate credit flow to various sectors of the economy, especially to the MSME and NBFC sectors.
  • Fiscal policy: The Union Budget 2021 has the largest capital expenditure (capex) budget ever and puts emphasis on doing business better.

A vibrant and self-sustaining economy will need private investment.It is important for India to recover from being an inflation outlier and turn to structural reforms that reposition the economy to reap the gains of productivity and efficiency.