The Hindu Business Line : Credit Policy — Neither surprises nor satisfies

While the Credit Policy is on expected lines, pointing to the need for greater access to funds for agriculture, small and medium industries, and infrastructure, a clear focus on increasing the resource-flow to these sectors is missing. Though it sends out a signal that the RBI will take strong action to help the market regain its vitality and robustness, its ignoring of the market crash of the decade is of concern, says S. Venkitaramanan.

THE RBI Governor, Dr Y. Venugopala Reddy's Credit Policy announcement for 2004-05 has come as expected. The political uncertainties in New Delhi and the absence of a duly-constituted new government taking the place of the old have not disturbed the Reserve Bank of India one bit, perhaps highlighting the bank's independence.

The rumours are that Dr Reddy did visit the prospective Finance Minister, Dr Manmohan Singh, but the usual consultations that precede Credit Policy must have been held with the official level, which consists of the Finance Secretary and his assistants.

The fact is that the Credit Policy is based largely on the central bank's own judgment unless government desires to contribute to it. At the moment, with the government yet to be formed, Dr Reddy has done his bit with his usual gusto and perspicacity. The public usually looks forward to the Credit Policy for announcements on the interest rate and the cash reserve ratio, besides indications regarding its thinking on exchange rate management. The latest policy statement leaves the interest rate environment unchanged as also the cash reserve ratio. On exchange rate, it makes the usual observations on the need for flexibility, but leaves us no wiser.

In the context of the latest rumours from the Federal Reserve Chairman, Dr Alan Greenspan, on the likelihood of tightening of rates, there was expectation that Dr Reddy will be inclined to do some tightening himself. But he has not done so, considering that the growth impulse of the economy in India is just nascent and an interest rate hike will harm it. Nor is inflation too high to call for such tightening.

Above all, interest rate increases will raise volatile forex inflows seeking higher returns. Dr Reddy has wisely left the interest rate weapon alone. So has he in respect of tightening credit flows. Our need is for more credit to certain sectors not less. The RBI Governor has rightly recognised the need for pragmatism in the Monetary Policy.

The Credit Policy statement includes a characteristically competent survey of macroeconomic and monetary trends during 2003-04. It notes that the rate of growth of GDP during the year has been higher than expected — at 8.1 per cent, against the RBI's own estimate of 7 per cent. This compares with the lower growth of 4 per cent the previous year, primarily reflecting the rebound in agriculture from a decline of 5.2 per cent the previous year to a growth of 9.1 per cent.

Inflation performance has been contained within 4.5 per cent, measured in terms of wholesale price index, till end March 2004. The reduction in inflation reflects lower increase in primary articles and in the fuel group. The trend continues in the current year.

Annual inflation on a WPI basis was lower at 4.2 per cent as on May 1, 2004, compared to 6.9 per cent a year earlier. However, a more meaningful indicator is that on an annual average basis, it was higher at 5.2 per cent compared to 3.9 per cent a year ago. The implicit threat of higher inflationary pressure arising from the hardening trend of crude prices has also to be kept in mind. The Credit Policy notes that the external situation continued to improve in respect of reserves. Reserves increased by $37.6 billion to $113 billion by end March 2004. Foreign currency assets alone rose by $35.5 billion. This is after making available to the Government $5.8 billion for repayment of high cost debt from multilateral and bilateral resources.

India's exports in dollar terms increased 17 per cent compared with 20.3 per cent the previous year. The current account deficit remained in surplus consecutively in the previous two years. It showed a surplus of $3.2 billion during April-December 2003. The trade deficit of $15 billion (the difference between exports of goods and imports) was more or less offset by private transfers of $15 billion.

The main strength of the BoP, apart from these flows of remittances, was through capital flows, which are primarily on FDI and portfolio accounts. These have an inevitable impact for monetary policy and exchange rate management. Insofar as exchange rate management is concerned, while the Credit Policy statement refers to the movement of real effective exchange rate, it refrains from a value judgment on the currently experienced appreciation of the rupee. It, however, cautions market participants on the need to hedge against exchange rate fluctuations.

The Credit Policy is on expected lines insofar as it concerns credit flows. It points to the need for greater access to funds for agriculture, small and medium industries, as well as for infrastructure. It mentions the various recommendations of different Working Groups on these issues. But a clear focus on increasing theflow of resources to these vital sectors seems to be missing.

The Credit Policy document has the usual coverage of various actions in respect of detailed segments of the economy. But it leaves out what should be done in the light of pronounced volatility in the stock market. This becomes important particularly in the context of the latest developments and the liberalisation of bank credit against shares.

One would have expected the Credit Policy to take into account the great crash of the year. Perhaps Dr Reddy thought discretion was the better part of valour. He may well be right, with critics of the market being more visible than its supporters. Surely, actions speak louder than words. One looks forward to strong action by Dr Reddy to help the market regain its vitality and robustness.

All in all, a Credit Policy that does not surprise but does not also satisfy all expectations. It is a policy statement that opens the doors for many initiatives, some of which are detailed in the statement. The coming months will tell whether there will be a dispensation in New Delhi that will work closely with Mumbai to make the projections of the policy regarding GDP growth and inflation realistic and realisable.

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