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THE SMILE IS back on Mint Street with the Reserve Bank of India certain of real GDP growth this year "significantly exceeding" the first estimate of 6 per cent in April. Credit goes to good rains heralding a sharp rise in farm output which tagged on to a continued upturn in industry and services sectors should switch on a boom, though no one is talking in terms of the Tenth Plan target of 8 per cent. While much credit goes to the farm sector, rather reluctantly, the RBI Annual Report concedes that "if India is to approach the growth target of the Tenth Plan, it is essential to step up the growth of agriculture significantly."

It is not champagne time yet for market players even as the Annual Report does hint at the worst being contained, if not over. Inflation is not expected to breach the 5-5.5 per cent range and a pick up in capital investment bringing on a current account deficit to absorb fund inflows should bring on happy times. Ever cautious, the central bank favours a high level of reserves to cover liquidity at risk though in the process it will have to manage any excess rupee liquidity which, however, may not be there if investments pick up sharply. The economy could break into a run if New Delhi merely checks cost escalations in public sector projects; delays in the completion of Central sector projects have led to costs shooting up and account for 59 per cent (around Rs 26,000 crore) of the actual cost. The Railways runs the largest number of investments delayed by more than five years followed by road and power projects.

Agreed, the fundamentals are strong. Still, there is a creeping suspicion that the ways of the Indian economy have become autonomous of the RBI and the Finance Ministry. The RBI may take exception to this and point to the recent cut in repo rate from 5 per cent to 4.5 per cent. But a counter could be why was not the Bank Rate pruned to prepare the economy before the kharif crop starts moving into the market. A 100 basis point drop in the Bank Rate moderates the prime lending rate by 40 basis points immediately and by a further 38 basis points in subsequent months. Against this, yields on government paper in the market drop by 66 basis points in a month. It is hard to explain the wedge because for banks the avowed rigidity in costs remain whether they lend or play the market. "Unconscionably wide spreads are unwarranted in a period of low inflation," says the Annual Report and the lending rates of public sector banks on March 2003 ranged from 6 per cent to 16.25 per cent on term loans while that of private banks between 5.80 per cent and 23 per cent and foreign banks 5 per cent to 20 per cent.

Excluding exports, sub-PLR lending formed one-third of total lending with the benefits going to industry. For, agriculture loans up to Rs 50,000 bear a 9 per cent tag while other loans cost 11-13 per cent. "The effective lending rates of commercial banks reflect high spreads," contends the Annual Report clinching the game for the RBI. The last Credit Policy advised banks to have a single PLR, but borrowers are still waiting. Bank of Baroda has snipped deposit rates but not the lending rate following the repo rate cut. That is an exemplar of the banking system and its mindset.

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