The Hindu Business Line : RBI Annual Report 2002-03: Credible and creditable

DR BIMAL Jalan, the RBI Governor who just relinquished charge last week, and his institution have dominated the news in the last few days, mainly because of the commendable achievements of the central bank under his tutelage. Compliments to Dr Jalan's management have been widespread.

It is appropriate, therefore, that the Annual Report of the RBI for 2002-03 takes legitimate credit for the successful management of the economy over the year.

The annual report continues the tradition of its predecessors in competently detailing the central bank's perspective on the economy as well as suggesting various policy guidelines for the future.

As expected, the Report tells a credible and creditable story of an economy well-managed, both in respect of domestic and external fronts, with reasonable price stability and a rate of growth that exceeds that of many other similarly placed countries, barring China.

Cautious optimism characterised the stance of macroeconomic policies during the year, notwithstanding the continuing slowdown in global economic activity and an environment riddled with several external shocks. The drought situation necessitated swift responses in supply management.

Food supply was bolstered by a drawdown of food stocks for targeted public distribution programmes, marked by a reduction in issue prices.

Inflation remained weak for the greater part of the year, edging up only in the last quarter in the wake of the rise in the international prices of crude oil.

The drought impacted on fiscal policy as spending on food and input subsidies increased. Revenue shortfalls also arose on account of the continuing slack in economic activity. The reduction of tax and duty rates resulted in slower fiscal consolidation.

Needless to say, the Government asserted its renewed commitment to improve the quality of fiscal adjustment through reform programmes and appropriate incentive structures to induce States to carry out fiscal reform. Debt consolidation continued.

There were cuts in key policy rates and cash reserve ratio signifying the fine-tuning of monetary-fiscal coordination for stimulating the revival of aggregate demand. The RBI faced challenges arising from large inflows of foreign exchange, leading to increased liquidity.

The overhang of liquidity resulted in distinct easing of rates. The RBI engaged in continuous operations to modulate and balance market conditions. Simultaneously, financial sector reforms, including those in relation to provisioning, were carried forward with the objective of rapid convergence with international best practices.

Legal reforms were also initiated enabling quicker recovery of problem assets. Technology in the financial system improved considerably.

The RBI's annual report notes that the year marked the launch of the Tenth Plan covering the period 2002-07 with an ambitious growth target of 8 per cent per annum over the period and envisaging further acceleration during the subsequent period.

The report notes without comment that the Tenth Plan strategy accords to public expenditure a principal role in raising aggregate demand until private investment can be crowded in sufficiently so as to sustain the growth momentum.

Keynesian ideology survives still, in spite of exaggerated reports of its demise!

The gross investment rate is expected to be raised to about 28 per cent of GDP from the current level of 24 per cent, part of the increase to come from a modest expansion in the flow of external savings.

Equally importantly, the Plan strategy emphasises a reduction in the incremental capital-output ratio from 4.5 to 3.6. This means, capital should be used more efficiently. Rural incomes have also to grow at a stable pace.

What is happening on the ground in the recent period, however, does not fully justify these projections of the Tenth Plan.

Absolute declines in agricultural activity have invariably dragged down the overall GDP growth. The report emphasises the need for greater concentration on public investment in agriculture and rural areas, especially in respect of irrigation sources and rural connectivity.

There is also need for restoring innovation and greater emphasis on agricultural research. Building rural infrastructure has an important place in the Plan. The report notes the various initiatives of the Government in this regard.

Turning to foodstocks, the RBI's report mentions the significant steps taken to reduce them. The report reveals that the stocks decreased from 62.6 million tones in April 2002 to 35.2 million tones in June 2003, as a result of the implementation of various policy measures in regard to procurement and distribution.

However, as against a sharp reduction by nearly 40 per cent in the closing stock, the food credit decreased only marginally, from Rs 52,484 crore to Rs 50,066 crore. One looks in vain for the reasons for this sharp discrepancy.

The RBI's report notes the modest revival in industry in the year. The index of industrial production rose through the first half of 2002-03, perked up by rural demand in the wake of the rabi harvest. The manufacturing sector was also boosted by export orders.

In an interesting Table, the report highlights the continuing delays in the implementation of Central sector projects, particularly infrastructure projects.

A large number of projects have been experiencing delays because of the absence of proper techno-economic studies, inadequacy of financial resources, delays in acquisition of land, problems relating to award of contractors, delays in obtaining clearances and above all inadequate infrastructural support.

The cost overruns of the delayed projects amounted to as high as 59 per cent of the original cost of such projects in 2002-03, as compared to 60 per cent in 2001-02. The power sector alone accounted for 52 per cent of these.

The report makes a competent and informative analysis of the various developments in Government finance and debt management. Particular emphasis is placed on the management of the external front. The external account saw a considerable accretion to reserves during the year. The report notes that the current account moved into surplus for the second consecutive year. The accretion on NRI accounts as well as of the capital flows during the period contributed to this.

The contribution of non-debt creating flows is stressed. The report notes that in August 15, 2003, India held the sixth largest stock of international reserve asset among the emerging market economies at $85 billion.

In terms of foreign currency assets alone, India ranks seventh in the world with an accretion of $10 billion at the end of March 2003. India has been designated a creditor country under the financial transaction plan of IMF, and participated in IMF support to Burundi. It has, indeed, been a long and creditable march from the crisis of 1991.

The report states that the reserves are distributed in credit-worthy instruments and partly placed with BIS. It may help the cause of transparency if the report itself analyses the currency-wise distribution of its reserves. There is a case for a wider dissemination of the information, already reported to be available on the website.

The report notes that whereas in the previous year the rate of return was 4.47 per cent of the foreign currency assets, it declined to 3.1 per cent in the year under review, both inclusive of capital gains.

The return exclusive of capital gains is only 2.8 per cent in the current year as compared to 4.12 per cent in the previous year. The global fall in rates is partly to blame.

The rate of return on foreign currency is lower than the cost at which the country earns foreign reserves at the margin, especially from non-resident sources. The RBI can provide comparable figures of returns achieved by other central banks in Asia. This will help us to understand the logic of the RBI's investments better.

Let us now turn to the financial performance of the RBI itself. The gross income of the central bank decreased from Rs.24694 crore to Rs.23185 crore in the last two years, due mainly to the lower interest rate environment.

The accounts provide for contribution to Reserve Fund, Contingency Reserve Fund and the Asset Development Fund. The net disposable income is detailed in the Table.

The surplus transferred to Government proposed has declined from Rs 10,320 crore in 2001-02 to Rs 8,834 crore in 2002-03. I had commented last year that the desirability of maintaining the high level of contribution to reserves should be subjected to objective periodic examination by a competent body.

The Contingency and Asset Development Reserve have already reached a level of 11.7 per cent of the total assets. Whether further enhancing contribution at the current rate is necessary has to be examined.

These are comments mainly of a peripheral nature. Overall, the RBI annual report for 2002-03 tells a credible story of progress and tells it well.

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