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The words of fiscal prudence and economic wisdom from Mint Street in Mumbai where the country’s central bank is billeted are always looked upon with avidity by policy-makers and economists alike. The Reserve Bank of India (RBI), true to its remit of charting the country’s monetary policy in the choppy sea of the economy, has not belied these expectations by its dispassionate diagnosis of the problems plaguing the domestic economy and providing pragmatic remed ies to sustain the high growth of the economy noticeable in recent years.

Delineating the developments across the economy over the years, the 2006-07 Annual Report of the RBI said at the outset that the Indian economy recorded robust growth for the fourth successive year during 2006-07 with real GDP growth touching 9.4 per cent. Real GDP growth averaged 8.6 per cent during the four-year period 2003-04 to 2006-07 and to 7.6 per cent during the Tenth Plan (2002-07) span, significantly higher than that of 5.7 per cent during the 1980s and 1990s.

The step-up in investment and domestic savings rate, growing linkages with the global economy, both on the trade and capital accounts, and signs of some improvement in productivity growth are the key “structural changes” that have lent ballast and bounce to economic activity in recent years. Conceding that it is possible for higher investment in infrastructure, both in the public and private sectors, the Bank pertinently called for “commensurate progress” on project design, project implementation, appropriate user charges and policies for such investment to be profitable and self-financing.

Noting several cyclical factors that have boosted domestic growth, the RBI said these cover robust global GDP growth for the fourth successive year, the persistent high growth in bank credit and money supply, the pick-up in non-oil import growth and the widening of the trade deficit in recent years. The latter was, however, offset to a large extent by the continuing buoyancy in net invisible surplus.

While the actual GDP growth during the Tenth Plan was close to the target of 8 per cent, growth of the industrial sector averaged 8 per cent during 2002-07, higher than that of 5.7 per cent in the 1990s and 6.4 per cent in the 1980s. Growth of the services sector has also displayed a consistent uptrend from 6.3 per cent during the 1990s to 9.5 per cent during the Tenth Plan.

A disconcerting development was, however, the growth in agriculture and allied activities which averaged 2.3 per cent during the 10th Plan, lower than that of 3.2 per cent during the 1990s and 4.4 per cent during the 1980s. Since the mid-1990s, the growth of the agricultural sector has been low as well as volatile; per capita annual production of cereals declined from 192 kg during 1991-95 to 174 kg during 2004-07 and that of pulses from 15 kg to 12 kg over the same period. The per capita availability of foodgrain has thus fallen close to the levels prevailing in the 1970s.

A worrisome feature on the farm front, the RBI contends, is that public investment declined from 3.4 per cent of agricultural GDP during 1976-80 to 2.6 per cent during 2005-06, while budgetary subsidies to agriculture surged from three per cent (1976-80) to seven per cent of the GDP (2001-03). Given the budget constraint, higher subsidies come at the cost of higher investments. The report said while subsidies might provide short-term benefits, they tend to impede long-term investments, besides abetting the inefficiency in the use of resources such as fertilisers. The apex bank also throws light on the financing requirements of the supply chain from farm to market — warehouses, cold storages, rural transportation, refrigerated trucks and other service intermediaries — that would need to be in place while minimising the transaction cost.

The report aptly attributes the crisis in the farm front to the slow pace of progress on intra-regional integration within the country, even as there has been rapid integration of the Indian economy with the global economy since the early 1990s. It, however, hastens to state that greater intra-regional integration is hampered by a host of factors such as segmented markets for agricultural produce, virtual absence of market for land (arising from lack of clear titles and land records) to facilitate consolidation of fragmented and unviable holdings, lack of reliable and stable power supply, absence of connectivity to outside markets through wired and wireless communication systems, lack of all-weather village roads, non-availability of rural infrastructure to underpin fruit and vegetable processing and poor service delivery in primary education and basic health services.

These problems are quite well known but how to solve them, given the lack of political will among the ruling dispensation, is what holds up progress in this major area where the proportion of population dependent on agriculture remains large, nearly 60 per cent.

Being the monetary authority of the country charged with the unenviable remit of maintaining price stability without jeopardising growth impulses from taking deeper roots to make development inclusive, the apex bank sounds a note of caution on financial integration of India at the current stage of its development.

Even as foreign direct investment (FDI) is perceived to foster physical assets and managerial skills, the Bank cautions against new types of FDI flows through private equity funds and venture capital funds. Because the latter may not necessarily have a direct link with investment in physical assets and could contain a volatile component at the margin. Aside from this, the report highlights downside risks to global growth prospects that would have a transmission effect on emerging market economies such as India.

The emergence of protectionist pressures, further rise in oil prices, persisting global imbalances, adjustment in the US on account of housing slowdown and potential shifts in financial market sentiment — all potential risks — could have some adverse effect on the domestic economy, if they materialise.

In the end, this year’s RBI report admits of “some evidence of cyclical elements in the growth process” albeit significant structural changes in the economy.

Even as it is sanguine about the growing evidence that the economy is possibly poised on the threshold of a step-up in the growth trajectory, the central bank puts the accent on the continuing need for vigil on price stability, including financial stability, in “a convincing manner”.

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