The Hindu Business Line : Consuming worry

THE VAULTING CONCERN of the RBI Annual Report 2004-05 over the galloping oil prices to the point of distraction from growth issues suggests an unwanted diffidence at the Reserve Bank of India Towers. Nowhere is the central bank verily confident of the current buoyancy aiding the economy to log 7 per cent growth to beat the impact of a zooming crude oil. New Delhi has been using the balance-sheets of the public sector oil companies to contain the impact of the oil price hike, but beyond a point it will have to raise the retail prices of the petroleum products.

The RBI has made a case for a single 10 per cent import duty across commodities, which along with a strong rupee, should be able to contain prices in the predicted 5-5.5 per cent range. By all indications, the kharif and rabi crops should do well so as not to bite the common man's purse. In the event, interest rates could hold on at current levels and the sub-prime lending rates, constituting 65 per cent of total outstanding advances, may incentivise fresh investments. But the RBI is not buying this argument and hints at inflation triggering a call on interest rates. It is also falling back on the old ruse of "trying to strike a judicious balance between price stability and growth." This is an economic orthodoxy which may not always hold true or be applicable. For the veteran US Federal Reserve chief, Mr Alan Greenspan, most oil shocks should not cause recessions nor should central bankers necessarily raise interest rates after a sharp hike in oil prices. Now, inflation is ruling at slightly above 3 per cent and a partial mark-up in the retail prices of petro product could nudge the index over 5 per cent. Also, a rate hike in the coming months may not go well with the flush of rupee funds in the system. The RBI could have kept its options open (it does claim as much) as the economy (for instance, the services sector) is moving at an athletic clip.

The Annual Report does not offer any leads on how the banking system will fund fresh investments across sectors. For instance, the Department of Biotechnology rues that banks are averse to lending to biotech start-ups, while a turbine manufacturer is not sure if they will fund wind power units. The entire banking system has defaulted on the 18 per cent agriculture lending norm, and the RBI admits to the system excluding "pensioners, self-employed and the unorganised sector". It is happening when gross and net non-performing assets have been dropping sharply on the back of write-offs and a palpable enthusiasm for investment by the corporate sector that is turning bad accounts into good.

There are in the Annual Report the usual paragraphs on broad-basing farming even when there are few lending counters for agri-business in banks. Employment in agriculture has remained unchanged at about 190 million in the 1990s; unemployment could worsen "with the growth rate of working age population exceeding the overall population growth rate". The slow pace of growth was there for all to see, when the Finance Minister, Mr P. Chidambaram, recently berated banks for setting lower deposits and advances targets with the economy expected to grow at 7 per cent. But the Annual Report has no peeves about it.

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