credit policy
overview
| coop banks
| basics
|
lending
|adv banking
| products
| IT
& banking
banking news |
banking software|
deposits|
bank directory|
internet banking|
IT directory|
our services
click here to return to main page of Mid-term Review of Annual Policy for the year 2004-05
Mid-term Review of Annual Policy 2004-05- 26th Oct 2004
I. Mid-term Review of Macroeconomic and Monetary Developments in 2004-05
Domestic Developments
11. Annual inflation, as measured by variations in the wholesale price index (WPI), on a point-to-point basis, rose from 4.6 per cent at end-March to 8.3 per cent by end-August 2004. It has since come down to 7.1 per cent by October 9, 2004. On an average basis, annual inflation based on WPI was 6.2 per cent as on October 9, 2004 as compared with 4.9 per cent a year ago. At a disaggregated level, prices of primary articles (weight: 22.0 per cent) increased by 4.3 per cent, the same rate as in the previous year. Among primary articles, high increase in prices was observed mainly for iron ore, tea and oilseeds. Similarly, increase in prices of ‘fuel, power, light and lubricants’ group (weight: 14.2 per cent) at 10.7 per cent was higher than that of 5.7 per cent during the corresponding period of last year. Among ‘fuel, power, light and lubricants’, increase in prices was across the board - in coal, petrol, diesel, aviation turbine fuel and naptha. Prices of manufactured products (weight: 63.7 per cent) increased by 7.1 per cent as compared with 5.1 per cent last year. Among manufactured products, a significant increase in prices was observed in basic metals & alloys, non-metallic mineral products and non-electrical machinery.
12. In order to isolate the impact of supply shock, a contextual analysis of WPI reveals that as on October 9, 2004, the annual price increases were relatively high in the case of four commodities which have a combined weight of 12.6 per cent in WPI: iron ore (290.0 per cent), iron & steel (26.5 per cent), mineral oils (16.8 per cent) and coal mining (16.2 per cent). Excluding these four items, the WPI inflation rate works out to 4.2 per cent as on October 9, 2004, on a point-to-point basis, as against 3.8 per cent in the previous year.
13. In the international oil markets, Brent, WTI and Dubai Fateh varieties have recorded average prices of US $ 49.7, US $ 53.1 and US $ 38.7 per barrel in October (up to October 22), registering increases of about 66.0 per cent, 65.3 per cent and 40.0 per cent, respectively, since January and 47.1 per cent, 44.5 per cent and 28.5 per cent, respectively, since April 2004. Subsequent to the increase in imported crude prices, domestic petro-product prices have been raised, though not as sharply. Since January 2004, domestic diesel and petrol prices (average of prices in four metros) have gone up by about 13.4 per cent and 10.5 per cent, respectively. However, the pass through of crude oil prices is still to be completed and is likely to remain the most critical factor influencing the domestic inflation in the medium-term.
14. Internal exercises suggest that in the absence of policy intervention, every US dollar increase in crude oil prices could potentially add 15 basis points to WPI inflation as a direct effect and another 15 basis points as indirect effect. In the hypothetical situation of passing on the entire increase in international oil prices since January to the domestic customers, the mineral oils price index would have registered an annual increase of about 27 per cent by October 9, 2004 as against the actual increase of about 17 per cent. As a result, the headline inflation which is presently at 7.1 per cent would have increased by another 1.1 percentage points due to the direct impact and further by 1.1 percentage points, with a lag, due to indirect impact. The impact of higher international oil prices has been partly cushioned by fiscal measures such as cuts in excise and customs duties. It may not be inappropriate to assume that similar burden sharing will continue to enable moderation of the incidence of oil price shocks in future, recognising that headroom available for absorbing the burden both by fisc and oil companies gets progressively reduced.
15. It may be recalled that the annual policy Statement had assumed the annual inflation rate at around 5.0 per cent by the end of 2004-05, on the basis of point-to-point variation in WPI. This projection was made at a time when IMD had predicted a normal monsoon for the current year. The Statement had drawn attention to the underlying risks to inflation emanating from international oil and commodity prices given the pass through of international prices to domestic inflation. The Statement had also cautioned about the potential inflationary impact of persistence of excess liquidity on aggregate demand. In retrospect, the magnitude and persistence of supply shocks was beyond what was anticipated by many. While there are uncertainties regarding the future course of international commodity prices, particularly oil prices, it is now clear that the year-end inflation projection will exceed what was anticipated at the beginning of the financial year. On current assessment, assuming that there would be no further major supply shock and liquidity conditions remain manageable, the point-to-point year-end inflation based on WPI for the year 2004-05 could be placed around 6.5 per cent.
16. Annual inflation, as measured by variations in the consumer price index (CPI) for industrial workers, on a point-to-point basis, was 4.6 per cent in August 2004 as against 3.1 per cent a year ago. On an annual average basis, inflation as reflected in CPI was 3.4 per cent in August 2004 as against 4.0 per cent a year ago.
17. During the current year, the CPI inflation has remained significantly lower than WPI inflation. While this could largely be attributed to the difference in coverage, the pass through effect of international prices has considerably weakened the association between the two inflation rates. The CPI inflation has been lower than the WPI inflation in the recent past reflecting lower increase in prices of food items. On the other hand, prices of certain industrial raw materials and manufactured products which rose sharply, do not get reflected in CPI basket directly. However, CPI inflation could be impacted by WPI inflation with a lag.
18. The Union Budget for 2004-05 placed the net and gross market borrowings of the Central Government at Rs.90,365 crore and Rs.1,50,817 crore, respectively. The Central Government completed net market borrowings of Rs.26,233 crore (29.0 per cent of the budgeted amount) and gross market borrowings of Rs.75,044 crore (49.8 per cent of the budgeted amount) up to October 21, 2004. Taking into account the receipts from states under the debt-swap scheme, the market borrowing programme as per the indicative calendar of the Central Government for the second half of 2004-05 was reduced. The weighted average yield on government borrowings through dated securities at 5.76 per cent this year so far (up to October 21, 2004) has been lower than 5.90 per cent last year. The lower cost of government borrowings so far this year could be attributed to two interrelated factors: First, lower volume of first half borrowings than usual on account of carry forward of surplus cash balance of Rs.26,669 crore at end-March 2004 into this year, reduced the borrowing requirements. Second, proportionately higher subscription emanated from market participants other than the traditional source of banks. While the Government could borrow at a lower cost so far, keeping in view larger than usual borrowing slated for the second half of the year, the market borrowing programme in the remainder of the year needs to be calibrated carefully in view of strong credit demand. It is, therefore, critical to ensure that there is no slippage in fiscal deficit.
19. Revenue deficit of the Central Government at Rs.62,906 crore was higher by about 3.5 per cent by August 2004 over the corresponding period of last year and accounted for about 82.6 per cent of the budget estimate for the whole year. The gross fiscal deficit of the Central Government at Rs.52,509 crore up to August 2004 was higher by about 20.8 per cent over the corresponding period of last year and constituted 38.2 per cent of the budget estimate for the current year. The state governments have prepaid Rs.13,781 crore of central government debt through additional market borrowings under the debt swap scheme. Such market borrowings by the state governments were in addition to the normal market borrowings of Rs.9,362 crore (up to October 21, 2004). Further, the states have prepaid to the Centre from their small savings collection.
20. In the recent period, there have been some instances of under-subscription to the state government issues despite easy liquidity conditions. This inadequate response on the part of the market participants once again underlines the need for prudent fiscal management at the state level to ensure completion of the approved borrowings of the state governments. In this context, the persistence of large aggregate borrowing of the Central and state governments continues to be a matter of concern in terms of its possible adverse impact on the desired acceleration in growth that is consistent with stability, as also from the point of view of ensuring efficient monetary and debt management. Nevertheless, there have been certain positive developments in this regard which could moderate the complexities in the medium-term. First, there were efforts towards framing of draft model of fiscal responsibility legislation at the state level. Five states have already enacted fiscal responsibility legislation and a few others are in the process of doing so. Second, the Central Government has also framed the Fiscal Responsibility and Budget Management (FRBM) Rules, effective July 5, 2004, unveiling the road map for fiscal consolidation.
>> Page 3
Advertise
| Book Store |
About us |
Contact us
| Terms of use | Disclaimer
© Banknet India |
All rights reserved worldwide.
Best viewed with IE 4.00 & above at a screen resolution of 800 x 600
or higher