Economic Highlights
New Delhi, 30 October 2009
Recovery Fragile
RBI PREPARES FOR
MORE SHOCKS
By Shivaji Sarkar
It’s an awkward situation. The doctor has a diagnosis but his
prescription does not treat the symptoms. This is what the Reserve Bank of India has done
in its latest review of the economy. Its diagnosis, however, has little to
cheer the nation. The Central bank Governor, D Subba Rao, says, “The recovery
is fragile, inflation is to touch 6.5 per cent by March 2010, private demand
has yet to pick up and services sector is performing below the expectations.”
The RBI has not made any change in the growth forecast. It
continues to peg it at 6 per cent and it appears that it still conforms to its
earlier projection of 5.75 per cent. Though Rao does not say more but his
actions indicate that he apprehends a serious crisis. Officially except
increasing the statutory liquidity ratio (SLR) - the percentage of deposits
that banks are required to invest in government debt - to 25 per cent from the
existing 24 per cent he has done little.
In fact, it is a more cosmetic prescription as most of the
banks are maintaining a higher SLR at 27 per cent. It is, however, a signal
that the Government is short of funds and its revenue generation is not
matching its demands. This is a sign that the Government would be borrowing
more to sustain its budget projections. The rise in SLR is a step backward
leading to the pre-reform age, when banks were forced to finance large government
deficits. “It is reversal of an exceptional measure,” says Subba Rao. This is
an indication that 2010 may not be as bright as it is being projected. The RBI
stress on tightening the screws, to prevent an impending financial crisis, is a
grim pointer.
In its concern the Central bank withdrew a special facility
that made funds available from banks to mutual funds and finance companies, made
loans to commercial real estate more expensive and forced banks to invest more
in Government bonds. The special facility was introduced last year to boost
liquidity to the financial sector firms after the credit market froze. It also
means squeezing the funding process that ultimately leads to speculative
activities in the stock market and the real estate. It should be seen as a
warning and signals distrust in the stock market functions and the real estate.
It is also a reversal of the policy from providing stimulus
to checking money supply so that inflation could be controlled. In other words
it could be said that the course of debate on economic stimulus has been
shifted from boosting growth to controlling inflation or managing inflationary
expectations.
In doing all this, the Central bank admitted that bank
credit remained sluggish, which is at 10.8 per cent now, and cut its forecast
for adjusted non-food credit growth in 2009-10 to 18 per cent from 20 per cent.
Non-food credit is a euphemism for the credit off take by the industry,
manufacturing and related sectors. This indicates that actual activities at
most levels have come to the minimum and there is little hope of recovery in
the near future. This possibly explains why Subba Rao calls the recovery or growth
“fragile”.
The RBI has reason to be alarmed with the rise in prices of
all assets - real estate, equities, gold and commodities. The equity prices
have risen by 75 per cent surprisingly in an economy that has remained
sluggish.
A 43 per cent year-on year growth in bank lending to real
estate at the end of August had already sparked speculation that the RBI might
act on these loans. The real estate prices spurted on easy funding and this had
to be curbed. The step would be welcome by all who are being fleeced by the
real estate sector but it does not give solace to over 30 million people who do
not own a dwelling unit. The real estate sharks so have not been contained but
the poor seekers of a hue are the worst sufferers. The Central bank with its
flip flop policies has not been able to bring any succour to them. Its
prescription of raising interest rates and squeezing credit has not hit those
it had aimed at. It has not yet ushered in a regime of quality credit - proper
appraisal of assets and the commercial sellers.
It is difficult to understand why it does not empower and
also make it mandatory for the banks to scrutinize the housing pricing system.
The banks have little say on the housing prices but they are expected to fund a
sector managed largely by rogue companies. The present prescription is also not
expected to hit them. Therefore, it calls for a strong instruction to deal with
these elements and not come out with mere showpieces as the RBI is doing
repeatedly.
Despite some improvement in the rise of the index of
industrial production (IIP) at 5.8 per cent compared to 0.6 per cent growth in
2008-09, it is not being considered as very positive. Intermediate and consumer
durable goods sectors witnessed higher growth but the performance of capital
goods and consumer non-durable goods was relatively modest.
The biggest concern is on the agricultural front. Fears have
been expressed because deficient rainfall might cause disproportionate impact
on overall economic prospects and on the sense of well being. “Poor output”, says
the Central banks “is bound to push up prices and depress rural labour incomes.
Given the inter-sectoral supply-demand linkages, the knock-on impact on the
industrial and services sector can also be significant".
Except expressing concern, the Central bank has not come out
with a viable solution to push the economy up. Going by its reservations, it
seems the country is in for many more shocks. ---INFA
(Copyright,
India News and Feature Alliance)
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