Bimal Jalanís successful stewardship of the Reserve Bank of India has ended in a burst of glory. It has been an eventful period starting with rumblings on the exchange rate front when Bimal Jalan hastened to use the conventional tools of central banks to control the rupeeís depreciation. As he leaves, he faces the ó weak ó criticism for the reverse phenomenon of the appreciation of the rupee. Jalan has, in his own lucid way, explained the policies that the RBI has been following and the limited options that he faced. He managed the onrush of abundance with the same nonchalance as he did the problems of an attack on the rupee. He leaves the RBI with the conscious assurance of a manager who has delivered the goods. The RBIís report for 2002-03 is a credible testimony to his successful tutelage of the bank.
As is usual with the RBIís annual reports, the latest one also continues the tradition of reporting on the nationís economy while at the same time commenting on the state of accounts of the central bank as well as the various changes brought about in the year. The report tells a credible story of progress on various fronts ó both domestic and external ó with reasonable price stability and a rate of economic growth that is higher than that of many other countries, barring China.
The year gone by challenged the ingenuity of the top management of the central bank as well as the government of India. The global economic slowdown created a tough environment for our exporters, both of goods and services. Added to this came drought, which called for and got a swift response from the authorities. Food supply was maintained with a drawdown from the abundant stocks, alleviated by a reduction in central issue prices. Inflation remained weak for the better part of the year, rising during the latter half of the year due to global increases in fuel prices.
The Centreís fiscal situation as well as that of the states came under strain because of drought-induced effects on both expenditure and revenue. Relief expenditures and increased food subsidies worsened the deficit. So did the slowdown in revenues, reflecting slackness in growth of demand. The government, however, reiterated its determination to achieve the goal of fiscal sustainability through its various tax reform programmes as well as changes in expenditure management. Efforts on debt management continued.
The report notes that the year was marked by increased liquidity in the financial sector, thanks to the large inflow of foreign exchange reserves. The RBI took various steps to manage the excess liquidity, while taking advantage of the resulting easing of rates. Financial reforms, including those regarding the provisions made by banks for sub-standard loans, continued apace. The emphasis continued to be on rapid convergence with international best practices. There was also a step-up in the pace of legal reforms in the financial sector, particularly in the area of recovery of problem assets. The report also notes the considerable advance in the introduction of modern technological aids to the financial sector. This continues the encouraging trend of technological modernization of banks over the last few years.
The report raises serious concerns about the poor state of progress with respect to a number of investment projects in the public sector. Some Central sector projects are reported to have been delayed during the year, owing to inadequacy of financial resources, delays in acquisition of land, problems relating to award of contracts, delays in obtaining clearances, and lack of adequate infrastructural support. Cost overruns of such projects amounted to 59 per cent of the original cost of such projects in 2002-03, an indicator of poor project management. The power sector on which the country depends alone accounted for 52 per cent of these overruns. Such poor management of ongoing projects bodes ill for the success of the ambitious expectations of the tenth plan, which visualizes giant investments in the Central and state sector. Obviously, the time has come to overhaul public sector management practices, if the tenth plan is to succeed.
The RBI report notes that the bulge in food stocks has come down, thanks to improvements in procurement and food management policies in the year. The food stocks decreased from 62.6 million tones in April 2002 to 35.2 million tones in June 2003. One interesting offshoot of this decrease is the reduction in bank credit against food grain stocks. But, the data in the report show that as against a sharp reduction of nearly 40 per cent in the closing stocks financed by such credit, the magnitude of credit has decreased only marginally from Rs 52,484 crore to Rs 50,066 crore. Does this mean that the banks are over-financing stocks' Or is it a case of banks financing the government against flawed collateral'
The report notes that the industrial sector saw a modest revival during the year, particularly boosted by export orders. Whether the trend will continue turns on the improvement in agricultural prospects. The rural economy is still weak and an important determinant of the economyís growth.
The annual report takes legitimate credit for the improvements on the external front. One important feature is that for the second consecutive year, the current account of the economy moved into a surplus. In addition, capital receipts from abroad grew apace, aided by non-resident Indian deposits as well as by foreign direct investment. The reserves grew substantially as a result. The report notes that on August 15, 2003, India held the sixth largest stock of international reserve assets among the emerging market economies ó at $85 billion. In terms of foreign currency assets alone, India ranks seventh in the world ó a creditable achievement and a long march away from the crisis of 1991.
The report notes that the disposition of the reserves is confined to creditworthy instruments held abroad. Partly, they are invested with the Bank for International Settlement. While it is true that the RBI has earned kudos for its successful management of foreign exchange rates and reserves, it would still help the cause of transparency if it discloses in the report itself the broad distribution of its investments, by category, not necessarily by specific assets. Particular concerns arise because the income from the investment of foreign assets declined during the year from 4.47 per cent in the previous year to 3.1 per cent. True, it is reflective of the generally low global interest rates. After all, our reserves are financing the tremendous appetite of richer nations at low rates of return. But, it would be helpful if the RBI publishes comparative data regarding the returns earned from similar investments by other countries, which have also substantial reserves, such as China, Hong Kong, Taiwan, Japan and Singapore.
Apart from reporting on the state of the economy, the annual report also incorporates details of the accounts of the RBI itself. Reflecting the lower interest rate environment, the overall income of the central bank declined marginally from Rs 24,694 crore in 2001-02 to Rs 23,185 crore in 2002-03. Out of this income, the bank provides for contributions to reserve funds, which are in the nature of prudential reserves. The amount available for actual expenditure after taking into account these transfers is the net disposable income of the bank, which has declined marginally from Rs 16,866 crore in 2001-02 to Rs 15,561 crore in 2002-03. Out of this, after allowing for its normal expenditure, the bank has a net surplus, which it transfers to the government of India. This amount in 2002-03 comes to Rs 8,834 crore as against Rs 10,320 crore in 2001-02. Consequently, the relief to the Indian governmentís revenue budget has declined marginally, although the government has also gained substantially from the overall reduction in interest rates.
The RBIís contributions to the asset development fund and contingency fund have already reached a level of 11.7 per cent of total assets ó almost near the set norm of 12 per cent. Whether the RBI should continue to contribute large sums to reserves, affecting the amount of disposable surplus, is yet not clear. The large accretions to forex assets are kept in creditworthy assets. In view of this, the relevance and desirability of further contributions to rupee-denominated funds have to be examined.
Overall, the RBIís latest annual report tells a good story of achievement and tells it well. It is a report to the nation, which Bimal Jalan can be proud of, as he leaves his post for his next one, as member of the Rajya Sabha.