Economic stock-taking

IT IS NOT at all surprising that the Reserve Bank of India should be decidedly pessimistic on the near-term macro-economic outlook even as it remains guarded over the medium term. In its recently- released annual report, which is essentially an economic stock- taking exercise, the central bank has revised the prospects for economic growth downwards for the second half of the year 2001- 2002. In its monetary and credit policy statement of April, the RBI had projected a growth rate of 6 to 6.5 per cent. That was based on the assumptions of a satisfactory monsoon and the possibility of an industrial recovery during the second half of the year. While the monsoon has not disappointed, the industrial recovery is elusive. All the usual indicators of industrial activity and business confidence suggest only a modest revival later in the year. One key indicator of industrial activity closely monitored by the RBI, the credit offtake, says it all. The latest figures show that non-food credit has so far grown by an historically low Rs. 1,715 crores or 0.4 per cent, well below the 3.5 per cent growth recorded during the same time last year.

A sharp reversal in the current industrial trends is necessary for the economy to achieve a growth rate of 6 per cent and above. What clouds the domestic outlook further is that there is a perceptible slowdown worldwide and India's linkages with the developed economies are growing stronger by the day. The RBI expects the U.S. economy to show signs of recovery only from the beginning of the calendar year 2002.

Striking a positive note, however, the RBI feels that the impact of the U.S. slowdown on India's merchandise and software exports will be moderate while foreign direct investment flows will remain largely unaffected. Domestic inflation levels are comfortable even though a continuous vigilance on the price front is necessary. On the external economy, the management of which has been a bright spot, the RBI cites several key indicators to justify its confidence. External reserves have exceeded $ 44 billions reflecting the improvement in merchandise trade account as well as the stability of the net capital flows. The current account deficit is expected to be well below 2 per cent even if oil imports go up substantially in the wake of an industrial recovery. Foreign direct investment inflows at $608 millions have been marginally lower than last year while foreign institutional investors have pumped in more on a comparable basis. Even with all those positives it remains to be seen whether the RBI is being overly optimistic. As the recent rating downgrades indicate, outside perceptions of the economy can change for the worse rather abruptly.

On the two crucial areas of interest rates and fiscal consolidation the RBI has not departed from its well-laid-out stance. There is a reiteration of its bias in favour of lower interest rates, although a lasting impact can be had only through financial sector reform. Surprisingly, the RBI has made only a cursory reference to the current raging problems afflicting the publicly owned financial institutions. Fiscal adjustments, according to the central bank, ought not to be merely through expenditure reduction but through a conscious strategy of revenue maximisation involving both tax and non-tax collections. Even in its prescription for growth, the central bank has not said anything new. It calls for increased investment in agriculture and infrastructure and for a far greater thrust by the public sector enterprises. The last point arises out of the realisation that the present slowdown is directly attributable to the private sector's inability to step up investment in a situation where the public sector investment is decelerating. Neither the diagnoses nor the prescriptions might be original. But coming from the RBI, they will be heeded with all the seriousness they deserve.

Send this article to Friends by E-Mail

Section  : Opinion
Previous : Shuffling the deck
Next     : Globalisation and politics