Reserve Bank Warns Of Further Liquidity-Tightening Measure

The Reserve Bank of India's annual report, released yesterday, has warned that rising inflation might trigger liquidity-tightening measures, called for public investment to provide impetus to the economy, asked the government to signal a reduction in the fiscal deficit and expressed concern that the tax/GDP ratio is stagnating.

The RBI has also said that the rising public debt and its changing composition from long to medium term has serious implications on fiscal policy.

The RBI's annual report for 1997-98 states, "the rate of inflation on a year-on-year basis has edged upward in the current year so far, causing considerable concern." This is the first time in the current year that the Reserve Bank has come out strongly against inflation.

The apex bank has stated that the "dominant" source of inflation like in the primary articles group triggered by a shortage of supplies. Giving a clear indication of liquidity tightening policy measure the report states the overall monetary situation would be carefully watched and brought under control so that inflationary pressures are eased.

"There is no trade off between growth and price stability in the short run and the central bank of the country has to ensure that growth with price stability is achieved without compromising the financial soundness of the system", the report said.

Even though the Reserve Bank has said that the GDP growth would be around 6.5 per cent in 1998-99, due an anticipated agricultural gowth of over three per cent, it has called for public investment to given an impetus to growth.

The apex bank has said that considerations of growth and fiscal consolidation require that predominantly large amount of resources of the government are channeled for investment purposes. This has special significane in the context of the trends witnessed in public invesment outlays in the recent years and the urgent need to step up infrastructure investment for improving the growth prospects of the economy.

Grave concerns have been expressed about the state of government finances. The report has said, "the emerging trend in the finances of the union government idicates that the pressure on the fiscal system would persist." This is so as the ration of revenue deficit to gross fiscal deficit has risen from 50.6 in 1997-98 to 52.8 in 1998.99.

That apart the union government has committed to implement the new devolution schemes for sharing resources between the entre and states as suggested by the 10th finance commissiont. "The implementation is expected to provide more resources to the states which could caused stress on the centre's resources.", the report has said. If the scheme is implemented efforts would be required to further step up revenue mobilsation by the centre to keep the fiscal deficit under reasonable limits. With the rising fiscal stress a failure to raise disinvesment proceeds will put further pressure on the centre's finances.

The report has also said that the although the present level of public debt may not pose any immediate problem to fiscal stability, it has implication for the medium term sustainability of fiscal policy.