The Hindu Business Line : Clean bill of health to economy

No doubt there are warning blips on the radar but they are surmountable since, according to the RBI Annual Report, the basic health of the economy is in good shape and the right policies are in place. A feel-good sense permeates the document.

The latest Reserve Bank of India Annual Report is quite reassuring. Whether it is the growth rate of Gross Domestic Product or the performance of the financial system or the trends in balance of payments, it gives a clean bill of health to the economy. No doubt there are warning blips on the radar but they are surmountable since, according to the Report, basically the economy is in good shape and right policies are in place. There is a feel-good sense permeating the document. Data presentation is authentic and comprehensive and analysis is of a high order thanks to the experts of the bank.

Inflation

The section on asset inflation has taken note of price rises in shares and gold but left out those in real-estate. The last two years have seen huge increases in the prices of land and apartments in Mumbai and other metropolitan cities. It has been facilitated by bank credit so much so that the RBI has had to take prudential steps by way of correction. Not to forget the bubble in Japanthat was mostly caused by the real-estate sector and from which it is yet to recover.

Unlike in the past periodical data on market values (and not what is shown in the registration offices) are now available from reliable real-estate agencies. The RBI should collate them and construct its own index on land and apartment values in major metropolitan areas to help in policy making

Fiscal Situation

What is impressive about public finances is the turnaround in the situation both at the Central and the State levels with a few exceptions. The central bank has pointed out its heavy build-up of deposits of the Centre and referred to the practice in various countries in dealing with such a situation.

Besides these deposits, there are those of State governments and the Centre with commercial banks. The RBI should take a holistic view of the whole picture. Transferring government deposits from the central bank to commercial banks and back is one of the methods of open market operations.

Forex Management

A welcome feature of foreign exchange reserve management is the de-emphasis on securities and the greater reliance on deposits both with multilateral institutions and leading international commercial banks. Thus 24.2 per cent of the foreign currency assets was invested in securities in 2005-06 against 27.2 per cent in 2004-05, while total reserves rose by $15 billion. The objectives of reserve management are reported to be "preservation of the long-term value of the reserves in terms of purchasing power and the need to minimise risk and volatility in returns".

The second objective seems to have a higher weightage in reality if one looks at the returns in this and the previous years. The earnings as percentage of foreign currency assets declined from 4.1 per cent to 3.9 per cent, if depreciation of securities is taken into account. Around Rs 1,000 crore was the loss due to depreciation. Though this was a small proportion of the total value, the question still arises as to whether the investment pattern could have been more optimal.

The RBI continues to keep the details of its portfolio under wraps on the ground that they are market sensitive. Although there is some auditing by outside firms there is no examination of portfolio selection. Thus, the central bank is perhaps the only privileged entity in the country in the happy and enviable position of not being answerable to its investment decisions vis-à-vis a corpus of funds that is more than the size of the Central Budget.

Currency Management

The problem of adequate supply of currency notes and coins has been sought to be solved by the RBI over the years by resorting to even imports in the past. But right now, contrary to what is stated in the report, the arrangement for the distribution of coins is not satisfactory. Under the policy of decentralisation, commercial banks have been told to arrange to distribute the coins. There is just one dispensing machine each in the Banking Hall of the RBI in Mumbai for coins with denominations of Re 1, Rs 2 and Rs 5.

The commercial bank branches have to indent for the coins from their currency chests. It means that a customer who wants change for, say, Rs 100, has to wait for a day. But what is worse, some banks say that since they get coins in bags of Rs 5,000 the customer should take the entire amount.

Obviously, the staff does not want to take the trouble of counting coins for dispensing small amounts. There is also an acute scarcity of Rs 2 coins in Mumbai. It is just unavailable in some banks. At the RBI, the staff places Rs 2 coins worth Rs 25,000 in the dispensing machine when the office opens. It is exhausted in an hour or so, and is not replenished. This is despite the notice of the bank advising the public to take change worth only Rs 200. This is only an appeal and cannot be enforced.

If one studies the history of coin management, one can detect a cycle, surpluses and deficits alternating. When bank vaults are spilling over with coins, the RBI cuts down its indent for them drastically, leading to a subsequent scarcity. To solve the problem, the RBI places a large indent with the mint resulting in another surplus situation. And the cycle goes on like the classic cobweb cycle in agricultural commodities. According to the report, the bank did not place any indent for any coin during 2005-06 but received supplies totalling just 41.4 million pieces in contrast to 896 million pieces in the previous year.

So expect a coin crunch in the coming months. People are well advised to hang on to their coins, as far as possible, especially to the Rs 2 ones. It is unfortunate that there is no scientific methodology to estimate the demand for coins for various denominations though much work has been done in other countries and RBI itself had constituted more than one group in the past, including one from the Indian Statistical Institute to deal with the problem.

Data Fatigue

In the past, the release of the Annual Report was an occasion for screaming headlines and big stories in the print media. In contrast, the coverage has been modest this time. One can detect a sense of déjà vu and data fatigue. The RBI comes out with periodical updates on the economy with great frequency. Only a few weeks ago, there was a detailed description of developments in the economy when the RBI had its quarterly review. Soon the Report on Trend and Progress of Banking in India and the Report on Currency and Finance (RCF) will be out carrying similar reviews though on a much smaller scale.

The Mid-Term Review of Credit Policy will be sandwiched between these publications before the year-end. There is no doubt that the RBI is rendering a great service through these periodical updates. The resumption of quarterly reviews filled a void and should meet most of the data requirements of students of the economy and policy-makers.

The RBI can think of dropping the review in RCF altogether. In fact, considering that it has become theme-oriented, it could altogether be scrapped and only a study on the theme may be brought out as an ad hoc publication. It is a departmental, and not a statutory, publication and hence a decision can be taken by the bank without any legal difficulty.

(The author is a former officer-in-charge of the Department of Economic Analysis and Policy, RBI.)

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