Domestic
developments :
According to the latest meteorological report, the rainfall in
terms of quantum and spatial distribution was generally
satisfactory. During the year, upto end September 1999, 28 out of
35 meteorological sub-divisions covering 81 per cent of the area
and 67 per cent of the districts in the country received normal to
excess rainfall. Seven meteorological sub-divisions received
deficient rainfall, of which the deficiency was marginal in three
sub-divisions. The overall assessment of the Meteorological
Department is that the monsoon has been "normal" (90 per
cent of the long-term average of 903 mm). The best estimate at
present is that the Kharif crop would be of the order of 102 - 103
million tonnes, about the same as the last year's level. Assuming
the expected improvements in the Rabi crop, it is likely that
agricultural production for the year 1999-2000 will be higher than
the previous year.
So far as the
industrial sector is concerned, after a period of deceleration,
there are now welcome signs of a recovery. The Index of Industrial
Production (IIP) registered a growth of 6.0 per cent in the
current financial year (April-August 1999) as compared with 4.2
per cent during the corresponding period of the previous year. The
increase in the IIP was mainly due to revival of growth in demand
for manufactured products and is reflected in the significant
improvement in the manufacturing output growth by 6.7 per cent as
against 4.2 per cent in the comparable period of the previous
year. Signs of recovery were observed in steel, cement and certain
other sectors. This is reflected also in the turnaround in the
demand for non-food bank credit, and in the buoyancy seen in the
stock and fixed income securities markets.
According to
the preliminary estimate of the Central Statistical Organisation (CSO),
the Gross Domestic Product (GDP) during the first quarter of the
current year grew at 5.5 per cent as against 3.6 per cent in the
previous year. Assuming that the recovery in industrial production
witnessed in the first half of the year will gather further
momentum during the rest of the year, and there is no unexpected
setback on the agricultural front, growth in GDP in the current
year is projected to be in the range of 6 to 6.5 per cent. This is
consistent with the range of 6 to 7 per cent, indicated in the
April Statement.
The rate of
inflation on a point-to-point basis on October 9, 1999 was 2.51
per cent as against 8.07 per cent at the same time last year. On
an average basis, the annual inflation rate is lower at 4.33 per
cent as against 6.28 per cent at the same time last year. The drop
in wholesale prices has also been reflected in the sharp fall in
the Consumer Price Index (CPI). In August 1999, the CPI inflation
rate was on a point-to-point basis as low as 3.15 per cent as
against 15.04 per cent in August 1998. Allowing for some increase
in prices due to seasonal factors later in the year and adjustment
lags in administered prices, the inflation rate for the current
year as a whole is likely to be lower than that of 4.8 per cent in
the previous year. Food stocks at the end of August 1999 were
29.90 million tonnes, which is higher by 4.04 million tonnes over
the same time last year. High level of food stocks combined with a
low rate of inflation, should provide greater manoeuvrability in
managing the economy in the event of any unexpected shocks.
The rate of
growth in money supply (M3) during the current financial year upto
October 8, 1999 has been 7.9 per cent compared with 10.1 per cent
in the corresponding period of the previous year. Annual growth in
M3 (October 8, 1999 over October 9, 1998) was 16.0 per cent as
against 21.1 per cent in the comparable period of the preceding
year (excluding the contribution of receipts under Resurgent India
Bonds, the increase in M3 last year was 18.7 per cent). Aggregate
deposits of scheduled commercial banks in the current year upto
October 8, 1999 showed an increase of Rs.53,487 crore (7.5 per
cent) as compared with Rs.66,978 crore (11.2 per cent). Excluding
Resurgent India Bonds, the increase in the current year so far was
7.7 per cent against 8.2 per cent in the same period last year. On
the basis of current trends, the projected growth in aggregate
deposits of Rs.1,18,500 crore for the year as a whole looks
realistic. In the light of the real sector trends and the expected
inflation outlook, which are more or less consistent with the
April Statement, the projected order of monetary expansion of 15.5
- 16.0 per cent indicated in the April Statement, appears
reasonable.
Reserve money
showed a lower expansion by Rs.6,322 crore (2.4 per cent) in the
current financial year so far upto October 22, 1999 as against an
increase of Rs.11,623 crore (5.1 per cent) in the comparable
period of previous year. Currency in circulation increased by 7.7
per cent in the current financial year so far as against 9.4 per
cent in the last year. On an annual basis, currency expansion was
14.6 per cent as against 13.6 per cent a year ago. The net foreign
exchange assets of RBI showed an increase of Rs.5,618 crore as
compared with an increase of Rs.9,472 crore in the previous year.
Net RBI credit to Government showed a lower increase of Rs.6,044
crore than Rs.13,710 crore in the previous year, mainly due to a
decline in credit to State Governments of Rs.3,843 crore as
against a decline of Rs.307 crore in the previous year. On the
components side, the large increase in currency in circulation was
the characteristic feature of the reserve money expansion. Any
possible expansion in currency till December/January 1999-2000 in
the context of the millennium change is expected to reverse to
normal before the year end.
Domestic and
international developments have so far allowed the Reserve Bank to
keep liquidity in the system at a comfortable level without too
large an expansion of reserve money. As per current expectations,
it appears that, with some appropriate adjustments, there should
be no difficulty in meeting fully the liquidity needs of different
sectors.
There has
also been a significant pick up in the bank credit and other flows
to the commercial sector from the banking system during the
current year, especially from the fortnight ending July 2, 1999.
Scheduled commercial banks' credit expanded by Rs.19,237 crore
(5.2 per cent) upto October 8, 1999 as against an increase of Rs.
11,645 crore (3.6 per cent) in the previous year. Food credit
increased by Rs.4,436 crore as against Rs.3,464 crore in the
previous year. Non-food bank credit increased by Rs.14,802 crore
(4.2 per cent) as against an increase of Rs.8,181 crore (2.6 per
cent) in the previous year. Together with the provisional data on
investments in commercial paper, investments in bonds / shares /
debentures of PSUs and private corporate sector, the flow of
resources from scheduled commercial banks to the commercial sector
increased by Rs.21,116 crore (5.3 per cent) as against Rs.17,540
crore (5.1 per cent) in the previous year. Banks' investments in
instruments issued by financial institutions and mutual funds this
year increased by Rs.1,498 crore as against Rs.3,136 crore last
year. Total resource flow to the commercial sector including
capital issues, GDRs and borrowings from financial institutions
increased by Rs.41,046 crore as compared with Rs.33,573 crore in
the previous year.
The Union
Budget for 1999-2000 placed the net market borrowings of the
Central Government at Rs.57,461 crore and gross borrowings at
Rs.84,014 crore. In the current financial year upto October 26,
1999, the Central Government mobilised net borrowings of Rs.57,977
crore, and gross market borrowings of Rs.72,630 crore. As spelt
out on earlier occasions, RBI has been combining auction issues
with acceptance by private placement of dated securities of the
Government consistent with market conditions. The release of such
securities through open market sales at opportune moments has
helped to contain the volatility in securities prices and reduce
the associated risks to major participants like banks and primary
dealers. Accordingly, in the current financial year so far, while
devolvement including private placements with RBI amounted to
Rs.29,267 crore accounting for 40.3 per cent of the gross market
borrowings, the reserve money impact of this was neutralised by
sales through open market operations conducted by RBI. Upto
October 26, 1999, net sales of government securities amounted to
Rs.23,695 crore. Thus, RBI's subscriptions in primary issues under
the Government borrowing programme, net of open market sales, this
year remained at Rs.3,305 crore compared to Rs.8,909 crore in the
corresponding period last year.
In the
current financial year, there has also been a move to elongate the
maturity structure of marketable debt of Government. The maturity
period of issued securities ranged between 6 years and 20 years.
Scheduled commercial banks' investment in government securities
increased by Rs.36,648 crore in the current financial year so far
(upto October 8, 1999) as against an increase of Rs.27,533 crore
in the corresponding period of previous year. Banks are presently
holding government securities in excess of SLR prescription by a
considerable margin. As mentioned in the April statement, in the
interest of maintaining stable interest rate environment,
Government's borrowing programme needs to be kept within
reasonable limits. This will also reinforce the process of
recovery in industrial sector and enable banks to adequately meet
the demand for non-food bank credit.
While RBI's
policy of subscribing to government securities on private
placement basis, combined with active open market operations, has
proved to be highly effective in keeping interest rates relatively
stable, an issue that needs to be considered is whether this is a
desirable policy of debt management from the long term point of
view. There is merit in the view that ideally government
securities should be sold in the market directly through auctions,
and the interest rate determined by the market. However, at the
present stage of development, government securities market is not
deep or broad enough to correctly reflect the prevailing liquidity
conditions or the underlying interest rate outlook based on
secondary market transactions. As the secondary market develops
and turnover increases, it should be possible to exclusively rely
on auctions to sell Government paper. This is the direction in
which RBI would like to move. However, one of the important
requirements for the secondary market in government securities to
develop is for Government's net borrowing requirements to be
sustainable. Unfortunately, at present, there is very little
flexibility available in regard to either the timing or the size
of Government borrowings in the primary market.
In the
management of monetary policy during the second half of the year,
a critical factor is the fiscal outlook for the rest of the year.
While gross revenues during the first half have been buoyant, the
net revenue of the Central Government is actually a little lower
than in the previous year because of the large increases in
transfers to States and Union Territories. The Central
Government's gross fiscal deficit during the first five months
constituted 60.2 per cent of the budget estimate as compared with
52.0 per cent in the previous year. The revenue deficit has also
been high and contributed nearly 70.0 per cent to gross fiscal
deficit as compared with
0 per cent
last year. These developments do not augur well for the future
unless determined action is taken to increase revenues, reduce
deficits in the public sector, and reduce expenditure through
appropriate policy actions. As recently announced by the
Government, it is imperative that necessary actions to correct
fiscal distortions are taken as early as possible. It may also be
mentioned that fiscal slippages are no longer regarded as a matter
of domestic concern alone. All over the world, international
agencies and investors keep a close watch on emerging trends in
Government finances, as they have a bearing on future
macro-economic stability.
External
Developments
The two-year period since September 1997 has presented major
challenges for the management of the external sector. During this
period, India had to cope with the global effects of a series of
intense crises in East Asia, Russia and Brazil, in addition to
continued uncertainties in industrial economies, particularly
Japan. After the Pokhran test last year, India was also confronted
with certain other unfavourable external developments, including
sanctions imposed by several industrialised countries, the
suspension of multilateral lending (except for some sectors),
downgrading by international rating agencies, and reduction in
investment by Foreign Institutional Investors (FIIs). While there
has been improvement in some of these areas and there are signs of
an upturn in the world economy in the last six months, the
external outlook continues to be characterised by several
uncertainties. The management of the external sector in the first
half of the current year also had to cope with some uncertainties
in investment outlook consequent upon dissolution of the Lok Sabha
in April 1999 and the ensuing electoral process.
Viewed
against the background of external and domestic uncertainties,
developments in respect of both the exchange rate of the rupee as
well as movement in foreign exchange reserves have been reasonably
satisfactory. As on October 22, 1999, the foreign currency assets
of the country were higher by US $ 3.70 billion compared with a
year ago. Foreign exchange reserves, including gold and SDR were
also higher by US $ 3.43 billion. At the present level of foreign
exchange reserves (at US $ 33.07 billion), reserves substantially
exceed the total stock of short-term debt and portfolio flows. As
pointed out in the April Statement, as a matter of conscious
policy, India will continue to keep its short-term as well as
forward liabilities at a manageable level in relation to the size
of its reserves.
The
day-to-day movements in exchange rates are market determined. The
primary objective of the Reserve Bank in regard to the management
of the exchange rate is to maintain orderly conditions in the
foreign exchange market, to meet temporary supply-demand gaps
which may arise due to uncertainties or other reasons, and to curb
destabilizing and self-fulfilling speculative activities. To this
end, as in the past, the Reserve Bank will continue to monitor
closely the developments in the financial markets at home and
abroad, and take such monetary and administrative actions as may
be considered necessary from time to time.
An important
development in regard to balance of payments outlook is the
substantial increase in the price of crude oil and petroleum
products in the last six months. Crude oil prices have increased
from US $ 16.71 per barrel at the beginning of April 1999 to US $
22.95 per barrel at the end of September 1999. On the whole, the
current expectation is that despite the effect of increase in oil
prices, the current account deficit in 1999-2000 will still be
below 2 per cent of GDP in view of the encouraging developments in
respect of invisibles, particularly private remittances and
software exports.
An important
area of concern for the management of the balance of payments
continues to be that of exports. Partly because of slowdown in the
world economy and also the East Asian economic crisis, exports in
1998-99 declined by 3.9 per cent in US dollar terms. There is some
evidence of pick up in exports during the first five months of the
current year when exports grew by 4.6 per cent in US dollar terms.
It is necessary that this momentum is kept up. In the previous
year, several measures for improving the delivery of export credit
in foreign currency to exporters at internationally competitive
interest rates (with a maximum spread of 1.5 per cent over the
LIBOR) were initiated. Some measures were also announced in the
April 1999 Statement in order to ensure the timely availability of
export credit and remove procedural hassles. These measures
included provision of 'On Line credit' to exporters, extension of
'Line of Credit' for longer duration for exporters with good track
record, peak/non-peak credit facilities to exporters, permission
for interchangeability of pre-shipment and post-shipment credit
and meeting the term loan requirements of exporters for expansion
of capacity and modernisation of machinery and upgradation of
technology. Improvements have also been made in the procedure for
handling of export documents and fast track clearance of export
credit at specialised branches of banks. In August 1998, the
Reserve Bank issued new simplified guidelines for sanction of
credit facilities for software services, project services and
software products and packages.
In order to
improve the delivery of export credit, the Reserve Bank has set up
a Bankers Group at the operational level (comprising senior
officials from commercial banks and the Reserve Bank). So far, the
Group has held 22 meetings with Chief Executives of major banks
and also held parallel interactive sessions with the exporters as
also base-level officials of the commercial banks at 14 major
export centres in the country in addition to discussions with
industry associations. Based on the deliberations in these
meetings, the Reserve Bank has issued further guidelines to banks
relating to simplification of application forms in respect of
medium and small exporters and deployment of trained and
experienced staff in branches dealing with export finance. The
experience seems to have proved useful in improving credit
delivery to exporters.
In addition
to foreign currency credit, exporters also have access to rupee
credit at a concessional rate of 10 per cent per annum at present.
The six month forward premium on sales of export proceeds has
generally ranged between 5 and 6 per cent per annum in the last
six months. Taking into account the premium available to exporters
on forward sales, the cost of credit in rupee would work out to 4
- 5 per cent per annum, which compares favourably with the
prevailing international rates of interest for corporate
borrowers.
An important
priority of the Government and the Reserve Bank of India is to
create an environment which is favourable to investment and
strengthening of financial links with the non-resident Indian
community abroad. In line with this approach, earlier this year,
procedures applicable to operations of bank accounts and financial
transactions in India by non-resident individuals of Indian
nationality/persons of Indian origin were drastically simplified
and a Non-Resident (special) Rupee (NRSR) account was introduced
in addition to other existing facilities for non-resident Indians.
The objective of the measures taken so far is to eliminate the
need for case by case permission and to provide as far as possible
a 'domestic' treatment to NRI community (in addition to the
special facilities available to them in respect of foreign
exchange transactions). New measures taken in the recent past
include:
(i) the extension of general permission under the Portfolio
Investment Scheme, available to individual NRIs to Overseas
Corporate Bodies.
(ii) the permission to buy/sell equity shares/debentures through
brokers under the Portfolio Investment Scheme
(iii) the general permission to purchase shares of Indian
companies from other NRIs, PIOs/OCBs. With immediate effect, it is
proposed to provide the following further facilities to NRIs
without the need for approval of the Reserve Bank :
i. Authorised Dealers may grant rupee loans and overdrafts in
India to NRIs against the security of shares/securities/
debentures or immovable properties held by such persons in India
for purposes other than investment.
ii. General permission to Indian companies for issuing
non-convertible debentures by way of public issue to NRIs/OCBs on
repatriation basis. The Indian companies, for such issues, need
not obtain approval of the Reserve Bank.
iii. At present, NRIs/PIOs/OCBs are permitted portfolio
investments in shares/debentures. These permissions by RBI are
originally for a period of 5 years which can be renewed by
designated banks. It has now been decided to delegate the powers
to Authorised Dealers to permit portfolio investment by NRIs/PIOs/OCBs
in shares/debentures.
Foreign
Direct Investment (FDI) proposals are approved under the automatic
route by RBI and under the approvals granted by Foreign Investment
Promotion Board (FIPB) in the Central Government. In order to
simplify FDI investment procedures, RBI has granted general
permission to the Indian companies under the automatic route to
receive funds and issue shares to their foreign collaborators
without approval of RBI. The same benefit has been extended to
foreign investments approved by the FIPB. Thus, in respect of all
cases of foreign direct investments, which are in line with
Government policy, case-by-case approval of RBI is no longer
required.
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