RBI report reveals slippages on economic front

RBI report reveals slippages on economic front
ENS ECONOMIC BUREAU

MUMBAI, AUG 28: It's going to be tough ride for the government if the challenges, dilemmas and slippages on the economic front, as revealed by the central bank of the country, are any indication. The Reserve Bank of India has cautioned the government on a host of issues ranging from the rising fiscal deficit, wage bill, inflation, sharp rise in oil prices, mounting foodgrain stocks and high borrowings in its annual report released on Monday.

``The variability in both output growth and inflation rate continues to exist,'' remarks the report, adding that the task of sustaining `quality growth over the medium to long term' is not complete.

Sounding a note of caution on the rising deficit levels of both the Central and state governments, the RBI called for a well-designed strategy for correction of the fiscal position of government finances in the medium term. The combined gross fiscal deficit of Centre and States have increased to 9.9 per cent of GDP (Rs 1,93,471 crore) in 1999-2000 as against the budget estimate of 7.4 per cent of GDP (Rs 1,56,928 crore) in 1998-99.

It said the expenditures of the government on wages, salaries and pensions seem to be the most important area where reforms have to be focussed. For instance, the expenditure of central government towards wages and salaries has grown at an annual average rate of 14.8 per cent to Rs 32,433 crore in 1999-2000 from Rs 11,069 crore in 1991-92, which was higher than the 12.5 per cent growth in the overall expenditure of the central government.

``Unless the size of the government is pruned, the wage bill would pose a significant burden on fiscal management,'' the RBI warned and said there was an urgent need to ensure the solvency of public finances in respect of pensions and other unfunded liabilities was attained.

``Also the first quarter of fiscal 2000-01 has also been characterised by several unfavourable developments including pressures in the foreign exchange market and increase in the overall rate of inflation largely due to an increase in administered oil prices,'' the RBI said, referring to the steep fall in the rupee value against the dollar. It also touched on the high level of government borrowings and the external debt position of the country.

Expressing concern over the mounting stock levels of foodgrains, it attributed this situation to the high procurement in response to the regular hikes in the minimum support price (MSP) unaccompanied by a commensurate rise in the off-take. The buffer stocks have generally ruled above the norms in recent years resulting in a high burden of food subsidy on public finances.

Amidst this gloom, the RBI is optimistic about the future course of the economy. ``Recent developments in respect of growth of India's exports and invisible receipts are highly promising which along with a high level of reserves and reasonable capital flows should contribute to external viability,'' it said. Notwithstanding recent developments, it continued, the prospects of posting yet another year of good real output growth seem to be realistic.

It said a multi-pronged effort was necessary to improve revenue buoyancy in tax collections, effecting necessary expenditure reductions and raising proceeds from divestment of selected public enterprises. Expenditure management also holds the key to achieving overall fiscal prudence, the RBI said.