The Telegraph
Since 1st March, 1999
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Finally, the best growth bargain Economy to expand 6% plus

Mumbai, Aug. 27: A Reserve Bank primer says the economy is poised for a growth rate that is ‘significantly higher’ than the 6 per cent projected earlier.

The catalogue of positives in the central bank’s annual report for 2002-03, that point to an acceleration, has been peppered with concerns over the fiscal frailties.

The boost to growth is expected to come from the turnaround in farm fortunes, helped by a normal monsoon, and a stronger industrial performance. Agriculture accounts for close to 25 per cent of the GDP.

The expected spike in growth could be sharper when bean-counters at the Reserve Bank plough through a larger data pool fed by numbers on the spread of monsoon and the pick-up in industrial activity. The monetary policy due in October could reflect it.

One of the salutary aspects of the report is the call RBI takes on prices. The report says inflation rate for the year “would be benign”, hovering below 5-5.5 per cent.

The industrial outlook is bright: expectations of new capital investments in existing projects, increase in capacity utilisation and stable inventories remain high.

The economy, says the report, has endured shocks at home and abroad to acquire a heartening resilience. “This suggests that perseverance with structural reforms, despite the drag of slower growth in the second half of 2002-03, has helped shock-proof the economy and sustain a stable macro-economic environment.”

On interest rates, the Reserve Bank says the cost of money will remain soft and flexible this year with financial markets experiencing the effects of ample liquidity. “The preference for a soft and flexible interest rate environment within the framework of macroeconomic stability will continue,” the report said.

Pointing to growth rates recorded in the Eighth and Ninth Plans, the central bank says the average annual growth of 8 per cent set in the Tenth Plan is feasible. That makes a 6 per cent growth rate in 2003-04 critical.

However, for that to happen, there must be a rapid dismantling of policy constraints, an end to procedural rigidities and a lid on price distortions. These must be accompanied by ‘appropriate changes in institutional architecture’.

Fiscal fright

The report reiterates concerns emanating from the runaway increase in fiscal deficits of the Centre and states. One of the ways to check that is for the government to step up savings. This will also help spare resources for higher public sector outlays on the cash-starved social and physical infrastructure this year.

Easier exit

The report calls for improvements in the nature of industrial restructuring by amending the Industrial Disputes and Labour Contract acts, besides evolving an appropriate legal framework for exit of firms through sale of land.

“It is vital at this stage to expand the ambit of reforms to areas concerning land laws, the labour market, bankruptcy and exit procedures,” the report states.

Emphasis has been laid on the need to overhaul the policy of reserving products for small-scale units. Not doing so will crimp growth and exports over in the years ahead.

Gilt hedge

The report urges banks rejoicing at the boom in government security prices to recognise potential interest rates, make larger provisioning and build up reserves.

“Banks have improved their profitability by passively investing largely in government securities, reaping trading gains with the declining yields and rising prices,” the report said.

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