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I. Review of Macro-economic and Monetary Developments: 1999-2000

Domestic Developments*

2. According to the estimates of the Central Statistical Organisation (CSO), the GDP growth in 1999-2000 is likely to be 5.9 per cent as compared with 6.8 per cent in 1998-99 and 5.0 per cent in 1997-98. (It may be noted that the CSO figures for 1998-99 have been substantially revised upwards because of increase in the growth rate of agriculture and allied activities to 7.2 per cent during that year.) A welcome feature of macro-economic developments last year was a substantial acceleration in the growth of industrial output,particularly manufacturing output. Recovery in industrial production, witnessed during the first six months of the year was further consolidated during the second half of the year. During April 1999-February 2000, industrial growth was 7.9 per cent, with manufacturing output showing a growth of 8.8 per cent.

3. The annual rate of inflation as reflected in the movements in the wholesale price index (1981-82=100) during the year was 3.74 per cent (on a point-to-point basis) and was 2.97 per cent (on an average basis). The inflation rates were significantly lower than in the preceding year + . The reduction in the rate of inflation was also reflected in the Consumer Price Index (CPI). The CPI for the month of February 2000 showed an increase of 3.61 per cent over the previous year (as compared with 8.64 per cent in February 1999). A relatively high growth of output, fuelled by sustained industrial recovery, combined with low inflation and high reserves, provided a positive environment for monetary management in 1999-2000.

4. During 1999-2000, the annual growth in M3, on a point to point basis, was 13.6 per cent (provisional) as against 19.2 per cent in 1998-99. The aggregate deposits of the scheduled commercial banks increased by 13.5 per cent as against 19.3 per cent in the previous year. It may be mentioned that a substantial part of the increase in the aggregate deposits was due to increase in time deposits (of over Rs.87,187 crore). This is a continuation of the pattern observed in 1998-99 when almost the entire increase in the aggregate deposits was accounted for by increase in time deposits.

5. Non-food credit showed an expansion of 16.0 per cent as against an increase of 13.0 per cent in the previous year. The total flow of funds from scheduled commercial banks to the commercial sector, including banks’ investments in bonds/debentures/shares issued by public sector undertakings (PSUs) and private corporate sector and commercial paper, etc., is estimated at Rs.69,380 crore as against Rs.56,558 crore in the corresponding period of the previous year. Total resource flow to the commercial sector, including capital issues, Global Depository Receipts (GDRs) and borrowings from financial institutions, is placed at Rs.1,34,013 crore as compared with Rs.1,13,488 crore in the previous year. The faster growth in bank credit to the commercial sector despite a lower growth in deposits was facilitated by substantial reduction in cash reserve ratio (CRR) and increase in non-deposit sources of funds, such as bills payable, operating surplus, etc.

6. Partly as a result of tax concessions extended to mutual funds in the last year’s Budget, there was a substantial increase in resources flowing to such funds during 1999-2000. Preliminary figures indicate that mutual funds have mobilised net resources of Rs.17,966 crore during the year as compared with a net outflow of Rs.1,204 crore in the previous year. Further growth and development of mutual funds, provided they are able to compete for household and corporate savings without special concessions, could contribute to the development and stability of the financial system in the long run. A developed financial infrastructure, with multiple intermediaries operating in different asset markets with varying risk profiles, is likely to be less vulnerable to unanticipated developments, including external shocks.

7. Food credit expansion during the year was of the order of Rs.8,875 crore as against Rs.4,331 crore in the previous year. Investment by scheduled commercial banks in government securities increased by Rs.54,612 crore during the year as against Rs.36,261 crore in the previous year. The share of lending to government in the overall deployment of resources by the scheduled commercial banks during the year was substantially larger than in the previous year.

8. As per the Revised Estimates in the Union Budget, the fiscal deficit of the Central Government (excluding small savings) for 1999-2000 was higher at 5.6 per cent of GDP as against budgeted figure of 4.0 per cent. As a result, gross market borrowings exceeded the budgeted level by Rs. 15,616 crore. In addition, State Governments’ gross market borrowings amounted to Rs. 13,706 crore as against Rs.12,114 crore in the previous year.

9. Due to favourable macro-economic environment, the Reserve Bank was able to meet the large market borrowing requirements of government without too much stress and without causing upward pressure on interest rates. In fact, secondary market yields on government securities of 7-year and 10-year maturity were nearly 110-120 basis points lower at end-March 2000 than those prevailing a year ago. Since 1998-99, a conscious attempt has been made to elongate the maturity structure of marketable debt of the Government to avoid bunching of redemption with consequent pressure on sustainability of the gross market borrowing programme. During 1999-2000, there was no issue of dated securities up to 5 years. Furthermore, about 65 per cent (Rs.56,630 crore) of the total dated securities (Rs.86,630 crore) issued during the year was above 10-year maturity.

10. An important monetary development during the year has been the negative growth in the monetised deficit of the Government (i.e., net Reserve Bank credit to Government), andlow growth of reserve money, despite large borrowing requirements. As on April 24, 2000, i.e., a day before the final closing of government accounts, the monetised deficit of the Government was negative by as much as Rs.5,584 crore, reflecting the success achieved by Reserve Bank in activating its Open Market Operations (OMO). This compares with an increase in the monetised deficit by Rs.11,800 crore in 1998-99 and by Rs.12,915 crore in 1997-98. So far as reserve money is concerned, the increase during the year was only 8.1 per cent as compared with 14.6 per cent in the previous year.

11. The relatively low growth of M3 of 13.6 per cent (as compared with 19.2 per cent last year) was possible because of a lower expansion in reserve money. Particularly significant was the decline in the monetised deficit of the government which contributed to this favourable outcome. It is interesting to note that if the reserve money growth and monetiseddeficit were of the same order in 1999-2000 as in the previous year, on the basis of the normal relationship among these variables, M3 expansion could have actually been even higher than last year, which would have had an unfavourable effect on the inflationary outlook for the current year.

12. While some comfort can be drawn from the fact that we have been able to manage a large government borrowing programme without undue strain on interest rates or the overall liquidity environment, it is also clear that such high levels of fiscal deficits are not sustainable over the medium term. The continuing large fiscal deficits year after year have already led to sharp increase in repayment obligations on outstanding public debt in the nineties. In 1990-91, the gross and net borrowing of the Central Government stood respectively at Rs.8,988 crore and Rs.8,001 crore in a ratio of 1:0.89. Thus, for every rupee of fresh borrowing, the government received 89 paise in net terms. In 2000-01, the gross and net borrowings of the government are projected at Rs.1,17,704 crore and Rs.76,383 crore respectively. Thus, in the current year, the net receipt for every rupee of borrowing will be only 65 paise. Yet another consequence of larger borrowings is the substantial increase in interest payments which will touch Rs.1,01,266 crore in 2000-01. Interest payments in 1990-91 were only Rs.21,498 crore.

13. The large borrowing programmes of Government year after year have also put pressure on the absorptive capacity of the market. The banking system now holds government securities of around 34.3 per cent of its net demand and time liabilities as against a minimum statutory requirement of 25 per cent. In terms of volume, the holdings above the Statutory Liquidity Ratio (SLR) amounted to about Rs.85,000 crore, which is higher than the last year’s net borrowings.

14. The overall monetary management has also become much more complex now than was the case a few years ago. The last year’s positive outcome was partly due to the fact that the economy was in a phase of business cycle when there was no problem of excess demand or emerging inflationary pressures. If the economy were characterised by excess demand and liquidity pressures, it would have been difficult to meet the large borrowing requirements of government without a sharp increase in interest rates and some crowding out of private investments. Under those circumstances, the economy could have slipped into a vicious circle of tight liquidity and high interest rates. It is of utmost importance that such an eventuality is avoided by taking credible fiscal action urgently. A national consensus on an effective and time bound programme of fiscal correction is, therefore, essential so that efforts made in this direction in the Union Budget for 2000-01 can be further intensified.

External Developments


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