Deceleration in economy: Cyclical downswing, not a deep structural slowdown, says RBI

Headline : Deceleration in economy: Cyclical downswing, not a deep structural slowdown, says RBI

Details :

In News

  • The Reserve Bank of India has released its annual report for the year 2018-19.
  • The report confirms that several sectors are undergoing a deceleration in the economy.
  • However, it states that the deceleration could turn into cyclical downturn rather than a deep structural slowdown.

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From RBI annual report

Slowdown in growth

  • India’s real GDP growth was an average of 7.7 per cent during 2014-18 and 8 per cent in the first quarter of 2018-19, however, it has slowed down in the remaining quarters of 2018-19.
  • The growth slowed down to a five-year low of 5.8 per cent in the March quarter of 2018-19.
  • Several sectors, including auto and consumer goods, have witnessed demand slowdown, production cuts and lay-offs.

Private Consumption moderated in the second half

  • Private final consumption expenditure, accelerated in the first half of the year, supported by higher disposable income due to lower food expenses. However, the demand has seen moderation in the second half of the year.
  • The pick-up in activity in labour intensive sectors like construction provided additional push to household consumption demand.
  • Rural demand, however, was affected by moderation in agricultural growth which reflected in tractors and two wheelers sales.
  • Passenger vehicles sales were the lowest in five years on account of increase in insurance costs, volatile fuel prices, and lack of financing options due to the liquidity stress in the non-banking sector.
  • The production of consumer non-durables slumped to its lowest level in the past three years.
  • Going forward, public expenditure through the Pradhan MantriKisanSamman Nidhi (PM-KISAN) and farm loan waivers by some states are expected to sustain rural demand.

Reasons for the slowdown

  • Protectionist policies and actions like escalation of trade tensions; volatile crude prices; uncertainty over Brexit also had its effect on the slowdown in the economy.
  • Structural issues in land, labour and agricultural marketing are holding the economy back.
  • Bank credit is yet to become broad-based and flow of resources from nonbank financial intermediaries is also quite slow.
  • The delayed onset and skewed distribution of the south-west monsoon has created risks in crop production and has led to a decline in rural consumption demand.

Credit Delivery and Financial Inclusion

  • The Reserve Bank has made sustained efforts during the year to increase the penetration of formal financial services in unbanked areas.
  • Moreover it has continued with its policy of ensuring adequate flow of credit to all productive sectors of the economy.

Initiatives

  • Setting up of an expert committee/working group to examine the issues relating to credit flow to MSMEs and agriculture sectors.
  • Allowing SCBs to co-originate loans with non-deposit taking NBFCs for credit delivery to the priority sector.
  • The National Strategy for Financial Inclusion 2019-24 was prepared, besides ongoing measures to strengthen financial literacy and inclusion in the country.

Monetary Policy Operations

  • Inflationary pressures from volatile international crude oil prices, and currency depreciation in the first half of the year, reduced significantly in the second half.
  • The monetary policy committee has cut the policy repo rate by 75 basis points during February-June 2019.
  • Forex operations by the Reserve Bank increased the pressure on system level liquidity, necessitating active liquidity management.

Payment and Settlement Systems

  • The Reserve Bank has made efforts to ensure that the country has a ‘state-of-the-art’ payment and settlement systems that are not just safe and secure, but are also efficient, fast and affordable.
  • It has also continued with its emphasis on innovation, cyber security, financial inclusion, customer protection and competition.
  • Going forward, Vision 2021 aims to achieve a ‘highly digital’ and ‘cash-lite’ society to empower every citizen with an access to a variety of e-payment options.

Efforts in Financial markets

  • The Reserve Bank conducted liquidity management operations for maintaining an appropriate level of liquidity in the financial system
  • Intervention operations were conducted in the foreign exchange market to contain volatility.
  • In order to facilitate trade and payments, efforts were made to streamline regulations and align them with the current business and economic environment.
  • The external commercial borrowings regime was also rationalised during the year.

Bank NPAs

  • Several measures have led to a decline in gross non-performing assets of the banking system to 9.1% in March 2019, from 11.2% in the previous year.
  • After initial difficulties the insolvency and bankruptcy code is proving to be effective.
  • Recoveries have gradually improved and as a result, blocks in the path of the investment cycle are easing. 

Frauds in the banking system

  • Frauds in the banking system has increased by 74 per cent to Rs. 71,543 crore in compared with frauds worth Rs. 41,167 crore committed last year.
  • The average lag between the date of occurrence of frauds and its detection by banks was 22 months.
  • Public sector banks constitute the largest share of the frauds, followed by private sector banks and foreign banks.
  • Frauds related to loans constituted the majority share of the total amount involved in frauds in 2018-19.
  • Frauds relating to card/internet banking and deposits constituted only 0.3 per cent of the total value of frauds in 2018-19, the central bank’s report added.

Section : Economics

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