The Hindu Business Line : Panic unwarranted

FINANCIAL MARKETS ARE on a stampede with yields going up in tandem with the inflation, and the Annual Report of the Reserve Bank of India seems to reflect much of that fear when actually it need not. Consumer price indices are still trailing an upwardly mobile wholesale price index, and the RBI does not want inflationary expectations to spiral as then the central bank, by custom, would have to step in by marking up the Bank Rate. International crude prices are unwinding, rains in August seem to have improved kharif and rabi crop prospects, and the economy seems to be still doing well going by first quarter corporate and government numbers.

In April-July 2004, the Centre's fiscal deficit stood lower at Rs 50,398 crore against Rs 52,518 crore for the same period last year backed by a 20.12 per cent growth in net tax revenues. Inflation could well subside in the coming months and the RBI will not be sticking its neck out if it waits till end-September before taking a final call on interest rates. There is excess, but stagnant, liquidity in the system as the corporates waver over making fresh investments in the absence of an infrastructure policy; they are still not overly worried over the uptrend in market interest rates. If market rates climb up on a par with the price of their cash credit limits with banks, a switch will happen and it may be hard for banks to resist the temptation to raise lending rates. As the RBI Annual Report dryly remarks, "bank loans continue to be special in the Indian economy." There is candid admission by the RBI that the benefits of low-cost deposits are not trickling down to the customers and the central bank is for widening the base of borrowers by offering loans to the farm sector and small and medium enterprises for whom it is "the availability of credit more than the price of credit which is of prime importance." Banks will have to build a diversified loan book and make profits on volumes as there is little to make from trading. The RBI, generically, has not been well-disposed to rural credit or the health of the credit delivery system there; anyway, the rural counters of government banks have little to show.

In May, the RBI had placed its bets on a GDP growth of 6.5-7 per cent but seems to have called them off in the Annual Report. It has now brought down the expectations a notch though the Annual Report does talk of bright prospects for GDP growth with the caveats of poor monsoon and uncertain oil prices. These age-old downside risks have been a constant for the Indian economy and it may be best for the RBI to sit with the Finance Ministry to improve the absorptive capacity of excess rupee and dollar funds. If economic reforms are not coming (it has become an unfashionable term), capital investments will slacken and that may be worse for the economy. To bring some freshness to the annual document, is it not time the Annual Report looked into the pattern of funds utilisation by various sectors and the policy tangles at the Centre and States which stifle credit flow?