Reddy on record

Credit Delivery

 Second, fiscal empowerment appears to be essential for obvious reasons. While the existing level of fiscal deficit may be manageable, the headroom available for meeting unforeseen circumstances appears rather limited.

 The problem is somewhat acute in regard to finances of states, which have serious structural problems and their resolution is possible only through accelerated fiscal support from Central Government consistent with the fiscal soundness of Central Government.

 Some of the legal reforms may also be necessary for this purpose and the link for further progress in the financial sector is obvious.

 In particular, the nature of fiscal dominance does constrain the effectiveness of monetary policy to meet unforeseen contingencies as well as maintain price stability and contain inflationary expectations.

 Third, the reforms in the real sector are needed to bring about structural changes in the economy.

 The liberalization of financial sector and of external sector can provide impetus for further growth and in turn help more rapid progress only when accompanied by reforms in the real sector, particularly in domestic trade.

 Fourth, there are what may be termed as 'overhang' problems in the financial sector, such as non-performing assets of banks and financial institutions.

 There are similar overhang problems in other areas as well, and it is necessary to make a distinction between what may be termed as flow issues and overhang issues.

 There is merit in insulating the overhang problem from flow issues and demonstrably solve the flow problem upfront.

 For example, in regard to food stocks there is addition to buffer stocks virtually on a continuous basis and a policy needs to be evolved to tackle this flow.

 Any attempt to sort out the overhang accumulated excess stocks on an ad hoc basis would obviously have limited success.

 Any solution to the overhang problem of large magnitude is bound to be operational over the medium-term and may involve admission of the magnitude of possible losses to be incurred.