The recovery from the pandemic and high rate of growth is like a chicken-and-egg situation as unless there is full recovery aiming for a high-growth trajectory, and unless this growth is sustainable, a country cannot recover fully, Finance Minister Nirmala Sitharaman said on Wednesday.
“It's a chicken-and-egg situation," she said at the governors' seminar on ‘Policies to support Asia’s rebound: recover, reconnect, reform’ organised during the 56th Asian Development Bank annual meeting at South Korea. "Have to be conscious about supply side constraints and act on them like we did during Covid and post it. The short-term measures will have to be kept in mind. Want to make sure vulnerable sections are taken care of first.”
For an immediate response, the countries have to ensure that the vulnerable sections are protected towards inclusivity, she said.
Sitharaman said that due to the pandemic in the past couple of years, the counties have knowingly gone into a situation of high debt but a fiscal glide path was necessary in the long term.
“Government debt, borrowing will have to increase to stretch resources to bring inclusivity, which will take a toll. So, knowingly, countries are getting into a situation of high debt which one cannot avoid. Having gone into a debt situation, we will have to have a glide path so that deficit management can be there for the long term,” she said.
India's debt-to-GDP ratio shot up sharply to 88.5 percent in FY21 due to Covid from 67.1 percent in FY14. In FY23, it declined to 83.1 percent. However, the International Monetary Fund April Fiscal Monitor report has predicted India's debt-to-GDP ratio to remain around 83.6 percent till FY28.
On inflation management, Sitharaman said the countries which have been able to quickly suck out the excess liquidity that was pumped in during Covid will be able to contain it more effectively.
“Countries are sucking out excess liquidity pumped during lockdown. Unless that is done quickly, inflation management will depend only on that tool of interest management. If a country has done better at sucking out liquidity, the interest rate management will not be the only tool. That way we will be able to contain inflation,” she said.
A number of institutions in every country need to work together on this as synchronisation of interest rate may not be always conducive.
“Central banks, like RBI did, need to make sure synchronisation of interest rate management is not always conducive. Particularly in Asian economies realised after the 2008 global financial crisis that every country’s uniqueness, peculiarities will have to be understood,” she said.
Interest rates have gone up, so MSMEs will have to be supported, she added.
Stressing on the need for long-term systemic reforms that India undertook during the pandemic, she said that widening the GDP through various services of activity will be essential.
“We (India) just did not talk about short-term fiscal and monetary policy, but placed importance on long term system reforms. We had these reforms undertaken, like the digital economy boom, as a result of which we were able to directly transfer money into the bank accounts of the poor,” she said.
There should be a conscious effort for widening of capital expenditure to create assets as it benefits semi-skilled labour and creates a multiplier effect. Every attempt needs to be made to widen GDP into new areas as the service sector is not just IT sector driven. Widening GDP through various other services of activity will be essential, Sitharaman added.
Emphasising on greater digital integration of economies, she said that it makes movement of people across borders easier.
“Now there will be re-globalisation i.e. renergising globalisation. There has to be digital globalisation. Unless countries’ systems talk to each others’ digital platforms, the benefits of it will not be achieved to benefit people. Technology has made cross border transfers easier. Cross border movement should be simplified as the entrepreneurial skills should be widespread,” she said.
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