INDIA NEWS
Growth v price stability THE HINDU Sep 3, 2012
The Annual
Report for 2011-12, a statutory report of the Reserve Bank of India’s central
board, covers two broad areas: the working and operations of the central bank
and its financial accounts for the year and the assessment of the macroeconomic
performance during the year and the prospects for 2012-13.
In
2011-12, the balance sheet of the RBI increased significantly by about 22 per
cent, mainly due to open market purchases of securities, and the gross income
by 43.4 per cent.
While
income from foreign assets continued to decline for the third year in a row,
earnings from domestic assets more than made up for the shortfall. The surplus
profit transferred to the Central Government at Rs.16,010 crore was almost
Rs.1,000 crore higher than in 2010-11.
Amid
serious signs of a slowdown and the alleged role of the monetary policy in
hampering growth, the RBI’s views are naturally relevant. The RBI says that
several other factors combined with monetary tightening contributed to the
slowdown. The report says that interest rates during 2011-12 might have
impacted inflation but they are clearly not the primary reason for the
downturn. Weighted average lending rates, net of inflation, were 3.8 per cent
in 2011-12, far lower than the average of about 7 per cent in the pre-crisis
period of 2003-04 to 2007-08 when investment had zoomed.
This
explanation will naturally not go down well with the several advocates of a
softer interest rate regime. However, for all its unequivocal statement, the
RBI is most probably not revealing its monetary policy stance. In other words,
whether there will be an interest-rate cut or not, the ensuing credit policy
review will continue to be a matter for debate, with both sides marshalling
their facts and figures. But the RBI’s assertion that high interest rates are
not the only, or even the main cause for the slowdown, gives a new twist to the
traditional monetary policy debate of growth versus inflation. If interest
rates have not made such a significant impact on the growth process (at least
in the pre-crisis period), is it possible for the monetary policy to
simultaneously take care of growth and price stability? Obviously, the answers
will not be clear-cut. Among other factors influencing the debate, inflation
expectations play an important part. The belief that high interest rates are
well entrenched and cannot be brought down easily will result in inflation
remaining high. As far as RBI policy reviews are concerned, there will not be a
radical change in the approach to growth versus price stability. It will
certainly vary the emphasis depending on the macro factors at the given point
in time.
During
2011-12, growth decelerated to below the economy’s potential due to global and
domestic factors. Inflation persisting at high levels and widening twin
deficits constrained the RBI’s scope for countercyclical measures.
WEAK OUTLOOK
Growth in
2012-13 is expected to stay at around the previous year’s level of 6.5 per
cent. Factors that held back growth last year remain and show no signs of
abating. New uncertainties have emerged in the form of unsatisfactory monsoons.
Since no
improvement in the global scenario is likely in the short-term, the problem of
adjustment will have to be borne by domestic policies. There is very limited
monetary and fiscal space to provide a direct stimulus. The RBI, therefore,
harps back on the difficult-to-implement suggestion to pare subsidies and use
the released money to step up capital spending. Inflation is expected to remain
sticky at around 7 per cent. Upside risks include deficient monsoons, large
upward revision in the minimum support prices and exchange rate depreciation.
Stressing
the need to address twin deficits to contain risks to macroeconomic stability,
the RBI feels that they are likely to remain wide during this year in the
absence of adequate policy response and no improvement in business cycle
conditions. With growth slowing, the pressure on the fisc will increase. Consequently,
some level of slippage becomes unavoidable. This, in turn, could crowd out
private investment at a time when reviving investment, both public and private,
is critical. This could, through higher aggregate demand, then spill over into
higher inflation and wider current account deficit.
The
overall CAD-GDP ratio may not correct significantly this year. Net services
exports are down. It is important to reduce CAD to manageable levels. The
resort to short-term debt flows to partially bridge CAD has some long-term
costs in terms of sustainability of such funds and refinancing risks.
Neither
the above near-term dissertation of the economy nor the medium-term challenges
listed out separately is new. Yet, the value of the RBI’s Annual Report is in
no way diminished.
The
supplementary issues that the RBI raises as for example the decline in
financial savings are extremely relevant at the current juncture.
Overcoming the crisis THE HINDU Sep 3, 2012
The worst
setback to the economy since 1991 on account of the weakening rupee and
deterioration in the budgetary position has become more daunting as a result of
the prevalence of drought conditions in parts of Karnataka, Maharashtra,
Gujarat and Rajasthan. The GDP growth for the first quarter, as per the official
data estimates released by the Central Statistics Office is placed at 5.5 per
cent against 8 per cent in the same period last year. As the performance of the
industrial sector has not been satisfactory so far, the growth in GDP has been
scaled down to 6.5 per cent for the current fiscal from 7.5 per cent initially,
and further to below 6 per cent. Moody’s have estimated the growth at only 5.5
per cent. Manmohan Singh, Prime Minister, however, is confident that it may be
even 6.5 per cent plus.
C. Rangarajan,
Chairman, Prime Minister’s Economic Advisory Council (PMEAC), for his part, is
exuding cautious optimism and has estimated that the growth may be even 6.7 per
cent. This is probably due to the expectation that agriculture and allied
industries will be making a contribution of 0.5 per cent against a negative
growth assumed in other quarters. The cautious optimism is, perhaps, due to the
expectation that the happenings in the second half of the current financial
year would be favourable.
The
progress of rainfall in the drought-affected areas was somewhat encouraging in
August and the deficiency got reduced to 12 per cent from around 20 per cent.
The forecast of the Indian Meteorological Department that the monsoon will be
near normal has gone awry. It is felt that the deficiency in rainfall will be
significantly lower and the output of food and cash crops in the Kharif season
would not be affected significantly.
BUDGETARY POSITION
Since the
Exchequer would be badly affected due to a shortfall in receipts from direct
and indirect taxes and on the foreign trade front too trends are unfavourable,
several measures aimed at stimulating growth in exports have been initiated
along with other steps for improving industrial growth. Towards this end, the
limits for borrowing in forex terms under various heads have been raised. The
objective would seem to be to relieve stringency in the money market and
increase the forex inflows. When Pranab Mukherjee was the Finance Minister, he
stated that there should also be a reduction in non-plan revenue expenditure,
excepting interest charges and defence expenditure, by 10 per cent in a year.
These exercises have not yielded tangible results so far.
INDUSTRIAL SECTOR
The
industrial sector too, has not performed satisfactorily so far. In April-June,
there was a contraction in industrial output to 0.1 per cent against 5.3 per
cent. It had been hoped that the industrial sector would acquit itself
creditably and enable the economy to overcome the meagre contribution of the
agricultural sector and allied industries. Since the net rise of over 6 per
cent in industrial output is required for the whole of 2012-13, it remains to
be seen how the phase of recovery will be aided through new measures.
On the
foreign trade front too, the happenings have been discouraging. It has not been
possible so far to register a rise in exports in forex terms. The performance
in the previous year was creditable in the first six months. In April-June this
year, there was a drop in exports by 1.7 per cent. The trade deficit, however,
was lower at $40 billion against $46.23 billion as there was a pronounced
contraction in imports. The preliminary details for July, however, are more
disappointing as it appears that exports in rupee terms also grew in a less pronounced
manner than in April-June.
Against
this sombre background, it will not be easy for the monetary authorities to
effect a significant reduction in key interest rates. The inflation rate, of
course, declined to 6.87 per cent in July from 7.25 per cent in June. As the
retail inflation rate is still high, a helpful decision by the RBI is still
awaited, especially as the borrowing programme up to July accounted for 42.51
percent of the gross amount excluding receipts from the treasury bills. The
Union Finance Ministry is, therefore, endeavouring to raise the required
resources through borrowing in forex terms and others also are being encouraged
to adopt a similar course. There may be an increase in interest rates on loans
in foreign currencies. These attempts will be helpful in the short term to
overcome resource bottlenecks. But there will be an increase in external
indebtedness and therefore in servicing charges in forex terms.
The need
of the hour is to augment the pool of resources in forex terms as well as rupee
terms. It will, of course, be possible to mobilise the required funds for
implementing the projects based on public-private partnership to some extent
through issues of tax-free bonds.
Without
the requisite resources and an increase in outlays on ongoing and new schemes
in the infrastructure sector, the economy cannot be placed on a new growth
path.
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