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India is expected to overcome Covid-19 pandemic losses by fiscal FY35, the Reserve Bank of India (RBI) stated in its report on Friday. RBI believes that monetary policy has to assign priority to price stability as the nominal anchor for the future growth trajectory.

In its report Currency and Finance (RCF) for the year 2021-22, RBI stated that India suffered among the biggest pandemic-induced losses in the world in terms of output, lives, and livelihoods, which may take years to recover. Economic activity has barely recovered to pre-COVID levels even after two years.

Further, RBI said India’s economic rebound also faces difficult challenges from the legacy of deep-rooted structural bottlenecks as well as the scars of the pandemic. The Russia-Ukraine conflict has also dampened the momentum of recovery, with its impact transmitting through record-high commodity prices, weaker global growth outlook, and tighter global financial conditions.

Also, RBI believes that concerns surrounding deglobalisation impacting future trade, capital flows and supply chains have amplified uncertainties for the business environment.

Talking about the Covid-19 pandemic, RBI said that the pandemic is a watershed moment and the ongoing structural changes catalysed by the pandemic can potentially alter the growth trajectory in the medium-term.

As per RBI, sustained thrust on capital expenditure by the government, push to digitalisation and growing opportunities for new investment in areas like e-commerce, start-ups, renewables, and supply chain logistics could, in turn, contribute to step up the trend growth while closing the formal-informal gap in the economy.

RBI highlighted that the pre-Covid trend growth rate works out to 6.6% (CAGR for 2012-13 to 2019-20) and excluding the slowdown years it works out to 7.1% (CAGR for 2012-13 to 2016-17).

Taking the actual growth rate of (-) 6.6% for 2020-21, 8.9% for 2021-22, and assuming a growth rate of 7.2% for 2022-23, and 7.5% beyond that, RBI said, "India is expected to overcome COVID-19 losses in 2034-35."

RBI points out that the recovery in economic activity remains stimulus-dependent, even as new risks to growth and inflation have emerged from the war in Ukraine and normalisation of monetary policy in the US.

It said, "For restoring and recreating a policy environment conducive for private sector-led growth post-COVID, timely rebalancing of monetary and fiscal policies may become necessary given the current configurations of debt and liquidity. Government debt exceeding threshold levels exerts upward pressures on the term premium and dampen growth. Time varying fiscal multipliers suggest that fiscal consolidation is not growth retarding once the economy recovers to its steady state. 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."

"What should be the appropriate monetary-fiscal policy mix in the post-pandemic future becomes a searing existential question for which past behavioural regularities, parametric estimates and analytical received wisdom may not provide adequate guidance," RBI added.

RBI stated that with monetary policy prioritising price stability and pursuing output stabilisation in an environment in which debt sustainability is sought to be achieved by fiscal prudence, the assignment rule is satisfied bringing in its train macroeconomic stability to support sustainable growth.

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