The Telegraph
Since 1st March, 1999
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The Reserve Bank of Indiaís annual report for 2001-02 has just come out. It not only talks about 2001-02, but also prospects for 2002-03. And with some egg on its face, the RBI now announces that the 6 to 6.5 per cent real gross domestic product growth target for 2002-03 is infeasible. Apparently because of drought. The impact of drought on agricultural production and the consequent adverse impact on the demand for manufactured goods will not be clear before November. In any case, barring Rajasthan, other states seem to be recovering. And for the April-July period, there is a 15 per cent dollar rate of growth in exports. This is more than enough to neutralize the GDP shortfall expected because of agriculture. But the 6 to 6.5 per cent growth target was never feasible, drought or not. It is understandable that the government should look for exogenous circumstances as scapegoats for growth deceleration, but why should the RBI indulge in this' During the eighth plan (1992-97), the average annual increase in GDP was 6.7 per cent. But during the ninth plan (1997-2002), growth dipped to 5.35 per cent, with around 5 per cent during 2000-03.

The reason is lack of domestic reforms, which is why, despite the global uncertainty, a country like China clocks 7 per cent, while India is stuck at five. Most reforms introduced concern the external sector and it is true that regardless of the indicator used, Indiaís external sector performance is good. But India has been congratulated enough for this. The RBI does some more of this and so does the International Monetary Fund, following article IV consultations.

However, given the burgeoning foreign exchange reserves, the IMF argues for a push on capital account convertibility. The RBI refuses to stick its neck out on this, or on tariff reductions. Both the RBI and the IMF are worried about state-level fiscal deficits, internal debt and lack of public sector reform. These are legitimate concerns. It would be good to see an enactment of the fiscal responsibility and budget management bill with some teeth. But these are easy arguments. What is the RBIís position on interest rates and monetary policy, despite concerns about fiscal policy' According to inflation figures, real interest rates are exceedingly high, especially for manufacturing. Inadequate investments may be driven by structural problems, rather than interest rates alone, but there is no denying that a drop in real interest rates is necessary, if not sufficient. The IMF argues for this, and for slashing of administered interest rates. On interest rate cuts, the RBI runs with the hares and hunts with the hounds. It would like lower interest rates and greater liquidity so that investment and credit are not constrained. But given high fiscal deficits and perhaps an increase in inflation because of drought, softer interest rates are unlikely. Monetary policy has approached a zone of ineffectiveness. Or so the RBI believes. But this last proposition is debatable. After all, the RBI has never experimented with really deep bank rate cuts. The overall message of the annual report is extremely worrying. The central bank is effectively saying that it doesnít know how the problem of growth deceleration can be solved.

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