High Inflation, External Debt South Asia's Most Pressing Problems: RBI's Shaktikanta Das

Taming inflation and keeping external debt risks in check are two of South Asia's most critical macroeconomic challenges, according to the Reserve Bank of India's Governor, Shaktikanta Das.

While the recent softening of commodity prices and supply chain bottlenecks should help in lowering inflation going ahead, risks to growth and investment outlook may rise if inflation persists at high level, the governor said at a conference co-organised by the International Monetary Fund on Friday.

Thus, prioritising price stability remains the optimal policy choice in the current context for the region, Das said. The approach to disinflation, however, needs to be mindful of the rising risks to the growth outlook amid deteriorating prospects for global growth and trade activity, he said.

"For successful disinflation, credible monetary policy actions accompanied by targeted supply side interventions, fiscal, trade policy, and administrative measures have become the key instruments," Das said.

During the first three quarters of 2022, food price inflation in South Asia averaged more than 20%. The region’s heavy dependence on imported fossil fuels has made it vulnerable to imported fuel inflation.

Adding to this, external debt, which was already elevated in low- and middle-income countries including South Asian economies, surged to $9.3 trillion in 2021 from $ 8.2 trillion in 2019, Das said.

While sustained and broad-based economic recovery remains the current policy focus, it is necessary to undertake deep structural reforms to raise the potential growth trajectories of the economies in the South Asian region, he said.

For raising productivity, Das said undertaking desirable structural change would require an improvement in resource allocation by moving production from low productive sectors to high productive sectors and promotion of innovation. While, skill mismatches, a major constraint to resource reallocation, would warrant policy focus on education and skill upgradation, he said.

The region’s investment on R&D must also increase from the current low levels, along with investment in physical infrastructure, he said.

Given South Asia's high reliance on fossil fuels and imported energy, the region needs to strengthen energy cooperation arrangements so as to enhance resilience to external shocks, the governor said.

South Asia is one of the most vulnerable regions to climate change because of its large population and degradation of natural resources, he said.

Tourism is a huge creator of employment in the region with untapped potential. Intra-regional tourist flows also remain below potential. Regional initiatives such as religious tourism circuits spanning countries that have common historical and cultural footprint, adventure tourism circuits, and medical/spiritual/ayurveda circuits can help boost the tourism industry and create a vibrant regional value chain, said Das.