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The Rediff Business Special / Jiban K Mukhopadhyay

'Three pc agricultural growth rate? RBI is overoptimistic'

The RBI 'mid-term credit policy' for 1998-99 is but a continuation of the first half (April) policy.

The best part of the policy is the mention of banking sector reforms in accordance with the Narasimham Committee's recommendations.

How and when they are going to be implemented is another matter. But the announcement itself is important. The banks will have to become more competitive than they are now.

Although there has been a high growth of M3 (total money supply), the RBI has kept all the rates at the same level, be it the repo (repurchase agreement) rate, bank rate, or even the cash reserve ratio.

The policy has mentioned that even without the Resurgent India Bonds, M3 expansion in the current financial year so far would have be around 7.9 per cent.

The rate of inflation is at a high of eight per cent. So some people thought the RBI would introduce a tight-money policy or increase the CRR so that additional liquidity in the market is blocked.

But the RBI did not do that. I think the RBI felt that industrial growth is rather slow and if they squeeze the CRR, then it will give a wrong signal. If M3 grows further, the central bank will have to take some measures. Luckily that has not happened so far.

Inflation is gaining ground more because of the failure of agriculture, not because of the money supply. The government will have to do something if inflation reaches double digits.

This policy is different from earlier policies because, traditionally, the credit policy used to have a lot of changes. But this time there are not many. The good point is that there is a mention that whenever there is a problem in the exchange rate, the RBI will come out with new measures.

I think the credit policy has lost its importance over the last two years with the RBI announcing a lot of measures in between. In fact, I feel there is no need for a credit policy twice a year. We can make an initial announcement in April and, depending on the situation, take new measures.

In western countries, the central banks look into the matter as and when required. So I don't think we need to take a look at credit policy every six months.

The credit policy estimates the agricultural growth rate at three per cent, but I think they are being too optimistic. There has been a tremendous loss to the paddy and other crops all over the country because of unseasonal rains. So I think agricultural growth will be not more than 2.5 per cent.

Same is the case with industrial output. I think it will not grow by more than 5.5 per cent though they (the RBI) expect it to grow by 6 per cent.

Overall, GDP will grow by 5.5 per cent in 1998-99, though the best estimate is in the region of 6 per cent. I am neither pessimistic like the Centre for Monitoring Indian Economy nor very much optimistic like Finance Minister Yashwant Sinha.

One thing the credit policy failed to mention is bank lending to the corporate sector, which is one of the major grievances of industrialists. But I think the job of the credit policy is to regulate money supply, not boost the economy. If a company has a bad record, then obviously it will not get loans. If it has a good record then it will surely get money. Because banks have also become competitive and have to perform well.

The fiscal deficit estimated in the budget was 5.6 per cent of the GDP. But I feel it will be nearer the six per cent mark. The deficit will increase because of non-plan expenditure. The government must take serious note of this.

(The writer is an economist at Tata Services Limited)

The RBI's Credit and Monetary Policy 1998-99