The Hindu Business Line : Report on Currency and Finance 2002-03: From numbers to themes

THE Reserve Bank of India (RBI) has released its annual Report on Currency and Finance (RoCF) for 2002-03. In the recent years, the Report, prepared by the Department of Economic Analysis and Policy (DEAP), has undergone a transformation from being a reference work documenting the developments in the economy with abundant statistics on all its aspects to a theme-based tract.

This year's theme is "Management of the External Sector in an Open Economy Framework". It is a subject for the specialist, covered in Chapters III to X. It is very analytical, provides rich material for commentators and requires close study.

But for the benefit of the non-specialist, there is Chapter II after "Introduction" which gives an update on the developments in the economy, carrying the story further from what was narrated in the Mid-Term Economic Review of the Bank a few weeks ago.

This is looked forward to by observers of the economy, as it is a forerunner to the Economic Survey of the Government of India presented to Parliament before the Budget. It is of even greater interest this year as the Economic Survey is not going to be presented due to the dissolution of the Lok Sabha prior to the ordering of the General Elections.

Given the limitations of space, this article confines itself to only a few points. Chapter II brings out the impressive progress made in 2003-04 so far, particularly compared with the poor performance in the previous year. Para 2.2 says that the inflation rate would fall between mid-January and March 2004. The recent weeks have seen an upsurge in the Wholesale Price Index.

To the extent that foodgrains have a substantial weightage in the index, their price trends would play a large role in determining the general rate of inflation. In the case of rice, the proportion of marketable surplus in total production in the kharif season is less than in the rabi season.

During the latter period, wheat and rice are both grown in the rich-irrigated areas of the North such as Punjab. In those areas, the proportion of marketable surplus in total production of rice is almost 100 per cent since the growing population consumes wheat only. These areas contribute substantially to the buffer-stocks of the Food Corporation of India.

The peak period of arrivals of rabi crops in the market is April-May, after which they become a trickle due to the onset of the monsoon. Ceteris paribus, they should have a moderating influence on the price level in those months.

The Report says that food stocks and ample forex reserves provide cushion against any inflationary rise. The food stocks have fallen steeply from 53.6 million tonnes (mt) at end-October 2002 to 22.1 mt a year later, reaching a peak of 64.8 mt at end-May 2002. The procurement during April-November 2003 was 27.1 mt, which was lower than the 32.4 mt in the same months of the previous year. Further, at the end of October 2004, the buffer-stock was only 4 mt above the norm of 18.1 mt fixed for the quarter. It is possible that procurement picked up subsequently.

The point to note is that big farmers and traders are quite savvy with food statistics. Declining stocks and procurement figures give them an incentive to withhold their output from the market anticipating better returns, thus bringing some pressure on prices. There is evidence to show that arrivals in the mandis in the peak kharif and rabi seasons seasons, as a proportion of total output, have been declining indicating the holding power of the farmers. In the context of bankers looking for customers with lower interest rates it should not be difficult for a trader or farmer to pledge or hypothecate stocks and raise credit for financing stocks. Forex reserves may not be of much use to deal with the situation unless the Government decides to import grains to bring down domestic prices.

But it would be anomalous and difficult to justify imports in a year of bumper harvests and may antagonise the powerful farmer lobby. All this is only by way of cautioning that the so-called cushion may turn out to be inadequate, and that there should be no complacency on the price front.

Another point is the impact on the country of the rise in international commodity prices, in general, and oil, in particular. If they did not have any serious repercussion till a few weeks ago, it is because of the lags involved in the transmission mechanism. This is true especially of oil.

It takes time to work out its secondary influence on the prices of output for which it is an input directly or indirectly. But there is a counteracting influence in the form of the rise in the value of the rupee vis-à-vis the dollar.

A large proportion of imports, including oil, is invoiced in the dollar and, hence, the beneficial effect of the appreciation of the rupee on the value of imports should help to moderate any rise in their dollar prices.

Para 2.27 points out the sizeable decline in the growth rate of the infrastructure industries from 6.1 per cent during April-November 2002 to 4.2 per during the same months in 2003. The decline in the growth rate of cement output from 8.9 per cent to 5.1 per cent is explained as due to subdued construction activities in the wake of the monsoon. But this is not a good explanation as monsoon was a common factor during the months in both the periods.

This decline is puzzling because there has been a tremendous upsurge in construction activities in houses, roads, and so on, facilitated by the availability of institutional finance at affordable interest rates. It needs further analysis.

Except for Chapter II on "Recent Economic Developments" there is nothing else in the publication to justify its being called the RoCF. The review of the current year could be taken out of the Report so that the document is purely a theme-based one and is appropriately named.

It does not mean that the public should be deprived of the update on the economy available now. It could still be published in the RBI Bulletin. In fact, it is time to revive the quarterly reviews of the economy, published in the journal in the early 1990s with the approval of the Deputy Governor. It was discontinued for reasons not known.

The quarterly reviews brought up to date the coverage in the half-yearly ones accompanying the announcements of the bi-annual Credit Policy by the central bank. It was looked forward to by the analysts because no other institution barring the Government has access to so much data contained therein.

(The author is a former Officer-in-Charge of the Department of Economic Analysis and Policy, Reserve Bank of India.)