Saving Shortage Ominous Portent

EPW Research Foundation Just when there was need for rates of interest on government debt and commercial sector borrowing to be moderated, there is taking place a stiffening of rates. Reflecting the shortage of domestic saving, this will have its impact on both the level of economic activity and the external balance, besides worsening the government's debt burden Policy Events MARCH was marked by several significant announcements the central budget and the government's borrowing programme, guidelines for the enlistment of primary dealers in government securities, the introduction by RBI of the auction system as an additional tool in its armoury of open market operations and one-time relaxation of the requirement of maintaining the daily average CRR for the first 13 days of the reporting fortnight from 85 per cent to 50 per cent for the fortnight beginning April 1. While the steadfast pursuit by the authorities of institution and instrument development in the money market is beginning to have some impact on narrowing the amplitude of fluctuations in money market rates, the process of unwinding from the distortions of earlier policies, including the forced pace of financial sector changes, remains incomplete. The externally-injected liquidity through portfolio inflows created a situation of liquidity abundance, giving an artificial impression of large domestic financial savings when in fact financial savings as well as overall domestic saving ratios have tended to decline. Secondly, there are some signs of disintermediation giving rise to a relatively more severe shortage of resources with banks. Thirdly, of the financial resources diverted in favour of the non-bank intermediates, a relatively higher proportion has been absorbed in secondary capital markets, thus accentuating the shortage of short-term as well as long-term primary capital required for productive sectors. As it is. the commercial banks as well as the UTI are stuck with their asset portfolios which they cannot unwind because of their falling asset prices. Finally, as a result of these factors, just the time when the rates of interest on government debt as well as commercial sector borrowings are required to be moderated, there has arisen a situation of stiffening of the rates. Apart from further deterioration in the government' s debt burden, the impending shortage of domestic savings and the increase in rates of interest may impinge on both the process of economic recovery and the external balance.