Context: In its report  World Bank said that India needs to maintain reform momentum in areas such as health, labour, land, skills and finance to reverse the current economic slowdown.

Key Points

• According to the report, the fiscal deficit of the central government is likely to increase to 6.6 per cent of gross domestic product (GDP) in financial year (FY) 2020-2021, and is expected to remain elevated at 5.5 per cent in the following year.
• "Implement critical reforms in key areas such as health, labour, land, skills and finance to come out stronger from the impact of the Covid-19 pandemic. 
• These reforms should aim at enhancing productivity of the Indian economy and spur private investments and exports.

Priority Areas Of Reforms

• Covid-19 has come at a time when the Indian economy had already been decelerating for nearly two years. The pandemic has exacerbated some of those challenges.
• Besides the immediate relief and recovery measures, the government has announced significant reform measures for agriculture, education, public sector, and micro, small and medium enterprises.
• The report says furthering such reforms will help put the economy back on a 7 per cent growth path.

Strengthening fiscal reforms
In order to instill fiscal discipline in handling Covid-19 related implications, the report suggests 

• India may reassess subsidies to leverage any scope for efficiency gains; 
• evaluate how much can be borrowed domestically and externally; 
• generate non-tax revenues more aggressively; and 
• link the repayment of new borrowings to disinvestment receipts.

Financial sector reforms
To put the financial sector on a sounder footing, the report identifies specific areas of reform. These include:

• Financial sector stability: the Reserve Bank of India’s (RBI’s) continued focus on risk-based regulation and supervision will be important as the temporary forbearance measures are phased out. Further strengthening of financial sector safety nets; close monitoring of liquidity and capital buffers; and regulatory and institutional framework for debt restructuring and insolvency could help deal with any spike in non-performing loans.
• Reforms in the non-banking finance company (NBFC) sector: reforms in the NBFC sector are needed to support its role in channelling credit to the real sector. In order to diversify the funding base and to strengthen the NBFC sector, recently launched liquidity schemes for NBFCs could be institutionalised. It would also be important to continue strengthening risk-based regulation and oversight of NBFCs.
• Deeper capital market reforms: deeper capital markets are critical for increasing the availability of long-term finance. The report calls for the government to continue its focus on easing demand and supply side constraints, and to build on recent initiatives. The report also suggests revisiting investment guidelines for institutional investors to crowd in long-term finance and address asset liability mismatch issues.
• Role of fintech: the fintech sector has the potential to close the gap in access to financial services and help firms, especially MSMEs, access much needed credit and liquidity. The report suggests mainstreaming fintech to reach firms faster and at a lower cost.
• Moving to a more strategic public-sector footprint: recent efforts including consolidation of public sector banks and strengthening of corporate governance are encouraging steps towards a more strategic public sector footprint. Moving forward, gradually scaling back the statutory requirement for state banks to provide liquidity, as well as the priority-sector lending policy, will help reduce market distortions.

Road Ahead

• “It is encouraging that the government is moving to a more selective and strategic public sector footprint in the financial sector. International experience shows this can boost the banking sector’s ability to support credit, facilitate effective financial intermediation, and reduce fiscal exposure."
• The current crisis has also brought to the forefront new economic opportunities in the areas of digital technology, retail, health-technology and education-technology services; and global demand in areas such as pharmaceuticals, medical equipment, and protective gear. These opportunities can provide new growth levers for India.