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Valiant bid to stem slowdown in economic growth

The measures initiated by the Reserve Bank of India and the Finance Ministry for relieving the liquidity crunch and reviving the economy are yet to yield substantial results. The liquidity crunch has of course eased and the situation is somewhat comfortable after the cut in cash reserve ratio by 3.5 per cent, the advance of Rs. 25,000 crore by the RBI to the Centre under the loan waiver scheme, ways and means limit of Rs.20,000 crore to the Centre and the loan facility for Rs. 20,000 crore at the repo rate for mutual funds.

Subsequently the statutory liquidity ratio was reduced by one percentage point to 24 per cent releasing initially Rs. 40,000 crore and on a recurring basis about Rs. 6,500 crore yearly. The releases to the extent of Rs. 2,45,000 crore apart from refinance facilities to the extent of Rs. 11,000 crore to the National Housing Board and SIDBI have softened the impact of the liquidity crunch even with the offsetting contractionist effect of a decline in foreign exchange reserves for $53 billion up to December 19 against a trade deficit of $72.9 billion in April-October.

The challenges in sustaining exports at a reasonable level can be met only over a period. However, the sharp drop in world prices for crude and petro products along with metals and other commodities may be offsetting the impact of reduced export earnings. The saving in respect of oil imports alone in November-March may be around $20 billion.

Following the cuts in repo and reverse repo rates as well as in the cash reserve ratio in stages interest rates on various types of loans have come down along with benchmark lending rates of several major banks. In order to protect profitability there will also have to be cuts in deposit rates. The Indian Banks Association has directed member banks to lower interest rates on housing loans up to Rs. 20 lakh in two compartments. The lower interest rate of 8.5 per cent up to Rs. 5 lakh and 9.5 per cent up to Rs. 20 lakh will benefit smaller borrowers, while some incentives have been sought for those in need of larger loans for residential houses in metropolitan areas. In any case the era of dearer money has come to an end.

It can be expected that the current account deficit for October-December may be less than the gap for July-September. It is noteworthy that foreign currency assets again increased by $3.6 billion during the week ended December 19 suggesting that forex outflow Resources was getting arrested though the improvement may also be partly due to strengthening of the dollar. Because of the sizeable decline in net foreign currency assets the rupee has weakened against the greenback to around 47.25 as compared to 39.26 in November last.

With an abatement of external inflationary pressures and an improved domestic food situation, the inflation rate is expected to decline to around 5 per cent by March next. Already it has come down to 6.61 per cent during the week ended December 13. As the Ministry of Petroleum and Natural Gas will be reducing further selling prices for gasoline and diesel oil as also LPG the situation may improve markedly early in January.

With inflationary pressures subsiding significantly, the Prime Minister, who is also in-charge of the Finance Portfolio, will be stepping up Plan expenditure by Rs. 20,000 crore in consultation with the Planning Commission while the Infrastructure Development Finance Company will also be enabled to mobilise Rs. 10,000 crore with the issue of tax free bonds. Non - plan expenditure also will be increasing substantially with the implementation of recommendations of the Pay Commission, larger subsidies and the like. Defence expenditures too will be rising because of the latest developments in the border situation. Petro bonds for Rs. 22,000 crore will be issued to three oil marketing companies carrying a coupon rate of 6.35 per cent and maturing after 15 years. Since there has been a noticeable improvement in prices for gilt edged securities, fresh borrowing can be attempted on a cheaper basis.

In the mid-year review of the economic situation, presented to Parliament, it is estimated that the fiscal deficit will get doubled to around Rs. 2,66,000 crore (5 per cent of GDP) from the estimated Rs. 1,33,287 crore or 2.5 per cent of GDP. As it has been necessary to step up expenditure for stimulating demand the increase in deficit will have to be met mainly from fresh market borrowing. As net market borrowing including short term loans have been estimated originally at Rs. 1,33,287 crore and the increase in the fiscal deficit to 5 per cent will call for additional borrowings of Rs.1,33,000 crore, the immobilised balances for Rs. 1.75 lakh crore under the Market Stabilization Scheme will come in handy.

It is proposed to repurchase bonds under MSS and presumably issue fresh loans to the Centre against the cancellation of repurchased securities. The heavy net market borrowing through new loans which may have lower coupon rates will not accentuate inflationary pressures. It will therefore be recognised that the additional borrowing by the Centre will not result in any suction of funds from the money market, as only immobilised balances as in the case of cash reserves with the RBI will be utilised.

The RBI repurchases of issued securities and subsequent re-issues in the form of new loans may get reflected in losses. These can be easily afforded as the monetary authorities should have made substantial profits when effecting sales of dollars at existing prices (these having been purchased by RBI in 2007-08 when the rupee was rising steadily). With a view to reducing further the cost of new loans, the repo rate may again be lowered by 0.5-1 percentage point along with a cut in cash reserve ratio by 50 basic points. It is expected that there will be a distinct improvement in the economic situation in January-March and the recovery will be brisker in 2009-10.

In view of the creditable performance of the agricultural sector and reduced inflationary pressures, it is now estimated that the growth in GDP will be 7-7.5 per cent in 2008-09. This will be in spite of the negative growth of 0.4 per cent in industrial output in October for the first time in 15 years. Even so, the growth under this head for the whole year may be around 4.5 per cent. There will of course be a bottleneck in respect of investible resources and entrepreneurs in the private sector will have to be helped to implement ongoing and new schemes with public private partnership. Sentiment on the bourses will have to be improved distinctly for fascilitating the mobilisation of rupee resources in various forms through right and public issues. The new government assuming power at the Centre after May will thus have to formulate its proposals for 2009-10 imaginatively, as there will also be larger foreign direct investment in mega projects in the infrastructure sectors.

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