Wednesday, August 25, 1999
RBI warns on deficit, optimistic of recovery
ENS ECONOMIC BUREAU
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MUMBAI, Aug 24: The Reserve Bank of India has forecast the country will enter the next millennium with an improved economic prospects with stability, but warned the government on the alarming rise in gross fiscal deficit, public debt and worsening state finances.
The central bank has expressed satisfaction over the fiscal developments with a word of caution urging the government to "ensure that the expectations of the 1999-2000 budget are fulfilled and fiscal deficit is not allowed to increase beyond the budgeted figure". It had come down heavily on the the central government's fiscal management last year. But the RBI has expressed concern over the fiscal slippage in state government finances and said this would have implications for the Centre's deficit.
''If the industrial recovery in the first three months is any indication, industrial production should increase at the rate of 7 per cent which averaged in the last four years. The very good output performance of capital goods industries augurs well,''the RBI said, adding that the rate of inflation is likely to remain low and much below the long-term trend. It said ''exports seem to have shown signs of rebound in the first three months of the current year. Capital inflows have also been at a reasonable level... the external current account deficit level would once again be well within the sustainable level.''
The RBI said the government should focus on expenditure reforms and move towards the introduction of zero-based budgeting. On the fiscal front, the central bank has advocated slashing aggregate expenditure to maintain or reduce the debt-GDP ratio. However, the central bank made it clear that the expenditure adjustment should not be done at the expense of capital expenditure which, as a proportion to total expenditure, has declined sharply from 26.1 per cent in 1991-92 to 22.6 per cent in 1998-99. ''The improvement in real growth prospects in recent months has enhanced the chances of augmenting resources,'' the RBI report said.
As a measure ofincreasing the revenue flow, the central bank has asked the government to bring the growing services sector under the tax net. "The growth of the services sector has long run fiscal implications to the extent that this constitutes a potential tax base for the government... A rising share of services in the GDP could result in lower growth of revenue to the government unless the indirect tax system is integrated under a single tax system such as the value added tax," the annual report said.
The RBI has also reiterated its stance that the present high level of fiscal deficit cannot be sustained in the long run despite a 6-6.5 per cent real GDP growth unless the government pushed up its revenue collections by bringing in changes in tax structure. Besides, the continuing high fiscal deficit increases the government's reliance on market borrowings putting pressure on interest rates and crowding out privae initiatives.
It has also turned the spotlight on state government finances which are showing palpablesigns of weaknesses with contingent liabilities like guarantees shooting up. The RBI has advocated a change in the states' fiscal agenda with large-scale investments in non-tradeable infrastructure sectors like power, roads and communications.
On the monetary policy front, the Reserve Bank has reiterated its stance of maintaining liquidity conditions to support real sector activities. Ruling out any immediate cut in interest rates as a fallout of low wholesale price index (WPI) based inflation rate, the RBI said the monetary policy could lean more towards bringing down medium and long term interest rates for industrial recovery. The divergence of inflation rate in the short run, according to RBI, could be an outcome of supply side shocks which disturbs the co-relation between monetary growth and inflation.
The central bank's bullishness on the external front is also evident in the annual report.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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