The Reserve Bank of India (RBI) has replaced its last year's bullishness on the economic front with cautious optimism for the fiscal 2001.
The central bank's annual report for 1999-2000, released yesterday, predicted yet another year of good real output growth but with a few riders. It has predicted the real GDP growth at around 6.5 per cent "" unchanged from last year "" provided industrial recovery is ensured and the services sector continues to be buoyant. The RBI also made it clear that consumption-led industrial recovery "" as was witnessed last year "" cannot sustain high growth.
Cautioning the government on the unsustainable fiscal position should the fundamentals deteriorate any further, the report listed the four challenges before the Indian economy as rising interest rates, uncertainties in oil prices, hike in inflation rate and a bearish capital market.
All these would make the task of monetary management in India a very difficult one. "The RBI will continue to monitor closely the developments in the markets at home and abroad and take such measures as necessary from time to time," the annual report said.
Barring the "fairly satisfactory monsoon conditions "other positive aspects of the economy are promising growth in exports and invisible receipts, a high level of forex reserves and reasonable capital flows. The projected growth rate, if achieved, should have favourable effects on inflation expectations, provided fiscal deficit and monetary expansion are kept at reasonable levels, the report pointed out.
The underlying theme of the RBI's annual report "" which has looked back at the entire last decade of the economic frontier "" is the gradual globalisation of the Indian economy. The changes in the RBI's monetary policy has been analysed in the perspective of the policies of the US Federal Reserve and the Euro zone.
The annual report also focussed on the growing power of e-commerce. The central bank has said the e-commerce route should be explored to boost exports. It has also called for bringing in e-trade under the tax net after global consultations.
After a year of subtle suggestions of the fiscal front, the central bank has renewed its war cry for fiscal correction. Coming down heavily on the fiscal imbalance of the Centre and state governments, the annual report said the slippage between the revised and the budget estimates of combined gross fiscal deficit of Centre and states was as high as 2.5 per cent of GDP and "any further erosion of the fiscal position could turn out to be unsustainable".
Stating that expenditure management holds the key to fiscal prudence, the RBI has called for a pruning of the size of the government. "Unless the size of the government is pruned, the wage bill would pose a significant burden on fiscal management," the report said. It has also emphasised on the urgent need to ensure that "solvency of public finances in respect of pensions and other unfunded liabilities are attended".
In order to augment revenue collection, the RBI has called for an appropriate mechanism to tax the e-commerce trade besides agriculture and the fast growing services sector. "...The absence of a proper mechanism to tax the trade based on e-commerce may prove to be a potential source of leakage of the tax revenue.... The government would have to work in concert with other countries, which are also wrestling with the problem, to find a feasible solution," it said.
Another area of critical importance, according to the RBI, is recast of public sector undertakings. Making a strong pitch for speeding up the divestment process, the RBI annual report said the government should chalk out different divestment strategies taking into account the capital market conditions and investor preferences.
It has also called for a cap on the quantum of value of state government guarantees given to its undertakings. The implicit or contingent liabilities in the form of guarantees given could post risk of defaults if the PSUs do not improve their performance, the report pointed out.
Referring to the industrial recovery witnessed in the last fiscal, the RBI annual report said the recovery was mostly visible in the consumer goods sector while the capital goods sector suffered a significant slowdown. The consumption led recovery would not help to sustain high industrial growth as infrastructure bottlenecks are substantial, the RBI has warned.
On the external front, the report has called for increasing use of e-commerce to boost exports as well as the FDI flow "with sufficient monitoring and regulatory safeguards". It has called for greater role of overseas players in the core sector and FDI by large oil companies. It has recommended a cap the POL imports at one-fifth of total imports to insulate the economy from cost push inflationary pressures arising out of oil price hikes.