ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Need for Expansionary Fiscal and Monetary Policies

If the recovery in the economic tempo has to be sustained and stepped up, the ensuing central budget must bring about a significant improvement in development expenditure as well as capital expenditure. Simultaneously the RBI must inject liquidity into the hands of banks and financial institutions so that they can expand further their credit base.

Success on Interest Rates Front

Despite the unfavourable fiscal environment, the Reserve Bank has been able, through a combination of measures, to bring down interest rates to realistic and relatively stable levels.

Need for Promotion of a Bills Market

The Reserve Bank has taken a series of measures to deepen the money and government securities markets and to facilitate equilibriating demand for and supply of short-term funds at fine rates of interest. Parallel efforts are called for to promote the market for bank-accepted bills as a major money market instrument to promote financing of asset-creating activities by banks.

Industrial Recovery on the Horizon

GDP is expected to grow by 6 per cent in 1999-2000, the same as last year, but a major qualitative change expected this year is the possible recovery in the manufacturing sector after three years of sluggish growth; the impetus to recovery seems to have originated in increased availability of bank finance.

Deceleration of Monetary Growth

There was a significant deceleration in monetary growth in 1998-99 if the accruals from the Resurgent India Bonds are excluded. The slowing down was particularly sharp in deposit money growth, attributable to the fall in farm output in 1997-98 and the three-year long industrial stagnation. There was also a decline in income velocity reflecting the slackness in real economic activity.

Failure to Break with Monetarist Approach

The most disappointing aspect of the credit policy statement for 1999-2000 is the Reserve Bank's failure to break with the crude monetarist approach of the past and bring to bear newer perspectives on monetary policy formulation as demanded by the state of the economy.

Decisive Measures Ensure Stability

In a fragile, structurally deficient environment, decisive steps taken to modulate market expectations alone can restore a semblance of discipline and stability in the financial sector.

Monetary Policy Hampered by Fiscal Inaction

The relatively credible programme of fiscal correction presented in the 1999-2000 budget, combined with low inflation and reduced credit offtake, has emboldened the Reserve Bank to try to bring down interest rates. However, the attempt is unlikely to revive industry in the absence of a sizeable increase in public expenditure and rapid expansion of bank credit.

Misplaced Focus on Fiscal Deficit

One of the disconcerting aspects of fiscal management since the beginning of the stabilisation programme in 1991-92 has been the failure to focus on correcting the growing revenue deficit of the central government. The focus instead has been on reducing gross fiscal deficit without taking into account the structure of financing of this deficit.

Correcting Interest Rate Distortions

While the monetary authorities have sought to correct the distortions in the yield rates on government debt, they have not addressed the question of high interest rates on commercial sector bonds for which the FIs and PSUs have been mainly responsible. The situation calls for policy initiatives by the RBI.


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