The calibrated monetary policy aimed at taming inflation and at the same time sustaining the growth process has been given up. The Reserve Bank of India Governor D. Subbarao is anxious that persisting high inflationary levels should be effectively tackled, even with the growth process getting slowed down, for avoiding the emergence of new pressures.
Towards this end, the repo and reverse repo rates have been raised by 50 basis points for the first time in recent months. Different procedures are, of course, being adopted for reckoning variations in key interest rates though the actual cost of credit will be one percentage point higher than the repo rate.
Though it is generally agreed that the monetary authorities have adopted a conservative approach and inflationary pressures have to be effectively checked even if the earlier calculations about the pronounced growth in gross domestic product GDP will get reduced to 8 per cent, many questions remain unanswered.
In some quarters it is felt that food inflationary pressures are getting under control and new difficulties have risen only on account of imported inflation.
Having regard to the assertion of inflationary pressures, the world over it can be safely claimed that the situation in India is comparatively less uncomfortable than the conditions in other countries.
Foreign trade
The trends in foreign trade in 2010-11 clearly indicate that agro as well as manufactured products are competitive in the traditional markets in the West as well as new areas in Latin America and elsewhere.
This will be borne out by the fact that the uptrend in exports in the past year has been sustained and shipments of textiles, leather, gems and jewellery, engineering goods and other items have fetched handsome foreign exchange earnings.
Also, there is no suggestion that the demand for various goods and services will be less keen. Indeed, having regard to the development in world markets, the uptrend in exports will be sustained and the plans for achieving growth in exports in excess of 25 per cent will be easily feasible. It will not then be difficult to secure forex earnings of $500 billion yearly in three years.
The favourable developments in 2010-11 facilitated a growth in export earnings of 67.12 billion while imports have risen by $62.32 billion despite an increase in the oil import bill.
The trade deficit could, therefore, be contracted by $4.80 billion to $ 104.83 billion. The favourable trends in exports and a pick-up in net invisible receipts, the current account deficit for October-December could be reduced to $9.7 billion ($12.2 billion). There will, of course, be an increase in this deficit for the whole year because of the unfavourable experience in April-September on account of a slow down in net invisible receipts.
The balance of payment position has remained comfortable as the bigger current account deficit could be easily absorbed as the net foreign exchange assets have increased to $273.70 billion (at the end of March 2011) from $252.76 billion (at the end of March 2010).
Agro sector
Another favourable factor for the economy as well as consumers is the extremely commendable performance of the agricultural sector in the 2010-11 agricultural season ending in June.
The latest estimates indicate that an all-time record has been established with the output of foodgrains rising to $235.88 million tonnes from the earlier peak of 234.47 million tonnes (2008-09). Even with a lower yield of rice, procurement purchases have been encouraging in the current marketing season so far. Also, it is hoped that wheat procurement will surpass the 25 million tonne mark (April-March). Taking into account the estimated current account deficit of $46 billion for the whole of 2010-11 and the outflows for investment purposes, the gross addition to forex assets were $68 billion.
As the meteorological experts expect that the monsoon will behave satisfactorily in the forthcoming kharif season, the Ministry of Agriculture has estimated that the output of food crops may be even 250 million tonnes. If these expectations materialise, it will be well nigh impossible to store bulging food stocks in good condition.
If exports have to be effected in limited quantities even after meeting the requirements of those below the poverty line on the stipulated basis, higher export prices for fine cereals may push up prices for both these cereals in the domestic market which will get reflected in a higher food inflation index. Fears in this regard have perhaps been responsible for continuing the ban on exports. Even otherwise the food index has been fluctuating irregularly around 8.5 per cent and if there has been no noticeable drop from this index in this level it is due to higher prices of other products which are not available in the desired volume or which are becoming costlier due to adjustments in procurement prices.
In fact, in respect of wheat the minimum support price (MSP) for the current season has been raised and some State governments also have agreed to raise the procurement price by Rs.100 a quintal.
A further drop in food index depends on the developments in the coming months with supply constraints in some directions getting moderated and availability from indigenous sources turns out comfortable.
Against this background, it is imperative that there should not be any disincentive for creating additional capacity wherever necessary and maximising production with the existing facilities. In fact, the earlier calculations regarding a pronounced growth in GDP by 9 per cent were based on the scope for raising the yield of food and cash crops to new high levels and a satisfactory growth in industrial output.
Though the trends in industrial production in 2010-11 have given rise to misgivings about sustained increase in industrial output, there is reason to believe that the details relating to variations in industrial output have not taken into account adequately the commendable performance of the textile, leather, consumer durables, gems and jewellery, engineering goods and other segments of the industrial sector.
If industrial growth slackens on account of paucity of resources for implementing on-going and new schemes, there will be a distorting effect.
The fears of the monetary authorities in regard to rise in inflation rate in the coming months on account of upward adjustments in prices of petro-products and the impact of external factors there will surely be a heightening of inflationary pressures in the short-term as visualised by the monetary authorities. (Luckily, there has been a short break in crude prices by more than $10 a barrel due to favourable developments in the Middle East and on the terror front.)
If world crude oil prices get stabilised at lower levels and the turmoil in the Middle East and West Asia is out of the way in a short period, the happenings in the latter half of 2011-12 should not be embarrassing.
Even if, according to the RBI, it is desirable to have slower growth with a view to tackling long term inflationary pressures, there should not be any disinclination to review the monetary policy after October especially, as the calculations of the Union Finance Ministry relating to the collection of indirect taxes should not be adversely affected. Also, reduced availability for domestic consumers and continuing brisk exports should not be inhibited due to slower industrial growth.
Tax collections
Any heavy shortfall in tax revenues over the budget estimate will get reflected in a higher fiscal deficit if it also becomes difficult to realise the anticipated proceeds of Rs.40,000 crore under the disinvestment programme. It will not be possible to ensure success of offers of sale by public sector units if the bourses continue to remain depressed and fresh forex inflows are not at the desired rate.
The decisions of the RBI and other developments brought about a steep drop of over 1,400 points in the Bombay Stock Exchange Sensitive index.
