The Reserve Bank on Monday said the increased government borrowing due to the pandemic has intensified concerns over its sustainability and led to fears of crowding out the private sector. RBI Governor Shaktikanta Das said the high borrowings amid the shortfall in revenues have also imposed additional pressures on banks that are facing problems like a jump in non-performing assets (NPAs) because of the pandemic.
“The adverse impact on government revenue and the resultant increase in sovereign borrowing in a period when fiscal authorities are also required to provide stimulus to economic growth, is increasing sovereign debt to levels that have intensified concerns relating to sustainability with crowding out fears in respect of the private sector in terms of both volume of financing and costs thereof,” the RBI’s bi-annual Financial Stability Report said. It can be noted that experts have in the past raised concerns over the rising government debt to GDP ratio, and flagged the crowding out of the private sector, which also requires capital to grow, as a key concern.
In the report, the Reserve Bank of India said the stress on bank balance sheets will be visible with a lag and added that corporate funding has been cushioned by policy measures and the loan moratorium announced in the face of the pandemic. “stresses would be visible with a lag. This has implications for the banking sector as corporate and banking sector vulnerabilities are interlinked,” the report said.
It said the policy focus is shifting from providing liquidity for the system to undertaking specific measures to support growth, including consumption and investment. “Although a recovery in economic activity from the lows of March and April 2020 is underway, it is far from being entrenched and output remains below pre-pandemic levels,” the report said.
The report also warned that easy financial conditions can have unintended consequences in terms of encouraging leverage, inflating asset prices and fuelling threats to financial stability.