Skirting the Basic Issues

THE euphoria over the Reserve Bank's latest credit policy announcement almost matches that generated by P Chidambaram's budget. And it could evaporate just as rapidly, for rapid, broadbased development in an economy of India's size is a more serious business than pleasing financial market players. By themselves financial sector operations have limited forward and backward linkages unless they are strategically linked to real sector activities. An excess of financial engineering in the money, capital, government securities and foreign exchange markets may for a while create an illusion of buoyancy, but in fact at the cost of real sector growth. Multiple layers of financial transactions, large treasury operations and high cost of funds are not calculated to support production activity with the required amounts of shortand long-term credit on affordable terms. While some details in the credit policy package may be directed towards the latter objective, the package as a whole is likely to prove dysfunctional and the already pronounced dichotomy between the financial sector and the real sector and, as a result, between the short- term money market rates and those applicable to the productive sectors and entetprises will be further entrenched.