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What Is India News Service
Saturday, February 03, 2007



 

 

 

   GDP Growth Projected at 9%, RBI Hikes Rate

  The government raised the country's gross national product (GDP) growth to nine percent up from 8.4 percent because of higher than expected agriculture output this fiscal year but the Reserve Bank of India (RBI) hiked short-term rates to check inflation.
     
 

The government raised the country's gross national product (GDP) growth to nine percent up from 8.4 percent because of higher than expected agriculture output this fiscal year but the Reserve Bank of India (RBI) hiked short-term rates to check inflation. With this higher projection, the Central Statistical Organisation (CSO) is hoping to achieve an average eight per cent in the Tenth Plan that ends Match 31, 2007.

Taking credit for the higher rate of growth, Finance Minister said that it was the United Progressive Alliance (UPA) government's investment-friendly policy that "boosted savings and investment" and "pushed industry to be more productive and efficient." However, he was cautious to say that the "impact on growth figures" still needs understanding as "the base figures have been revised." In other words, given the base being higher, it is unlikely that the farm sector can keep the growth rate the same which in fact may decline to one per cent next year. Last year, the growth of cotton and sugarcane brought the growth rates higher, but availability of water and rains this year may dictate the outcome this year since most of India's farm sector is rain-fed.

 
 

With the revised number, and excluding an equivalent black market in the unorganized sector, the GDP is estimated at Rs. 2,604,532 crore (USD 585 billion) compared to Rs. 2,389,660 crore (USD 537 billion) the previous year. The black market in India is conservatively estimated to be at least this value if not more. The farm sector this year was higher at six per cent compared to the estimated 3.9 per cent and the manufacturing sector also did marginally better at 9.1 per cent (estimate of nine per cent). Similarly, construction sector was revised higher 14.2 per cent, transport and communication at 13.9 per cent.

With these new figures, the per capital income at constant prices of 1999-2000 is now estimated at Rs. 20,734 or 7.4 per cent for 2005-06 over the previous year. While savings and investment of households and private corporate sector rose to 33 per cent of the GDP, the savings rate of public sector undertakings declined.

Even though the savings rates has been spectacular, the RBI, in its third quarter review of monetary policy for 2006-07, decided to raise inter rates of short-term lending to banks by 25 basis points ostensibly to check high inflation which naturally flows from sudden growth. The inflation in the nation (only at the wholesale level) is above the target 5-5.5 per cent and the retail inflation is much higher than this number. Even these numbers are questionable since it does not reflect an accurate representation of consumables. Additionally, it also noted several trends in financial market behavior and has instituted corrective action to guide behavior that will foster long-term growth and exclude short-term profiteers. The RBI Governor Y.V. Reddy insisted that the rate hike will not affect the country's GDP growth since the cash reserve ration (CRR) and the statutory liquid ratio (SLR) remains unchanged but warned that it may alter these rates if warranted to maintain stability.

Firstly, having looked at the pattern of deposits and loans the RBI seems to have determined that higher interest rates in India are attracting non-resident deposits and spurring speculative loans. Therefore, the RBI lowered the interest rate payable on such deposits and restricted loans against such deposits to Rs. 20 lakhs.

Secondly, the RBI seems to have noticed increasing speculative action in capital and real estate sectors and has tightened bank exposures to these sectors. The central bank made a distinction that it is talking about institutional speculation and not individual housing.

Thirdly, noticing a higher revolving debt such as credit card and personal loans and increased exposure to real estate sector (excluding residential housing), the RBI has increased the provisioning requirement to two per cent saying that this trend "is a matter of concern." Provisioning requirement for residential housing remains at .4 per cent to loans up to Rs. 20 lakhs and one per cent for loans beyond that figure.

Fourthly, noticing a surge in the number of non-banking financial companies (NBFC) exposure in banks' balance sheets, the RBI has now increased the provisioning requirement for these assets to two percent. It has also increased risk weight for banks' exposure to NBFCs to 125 per cent from the current 100 per cent. However, the provisioning requirement and risk weight for banks' exposure to asset finance companies has not been revised.

Fifthly, the provisioning requirements for agricultural loans, small and medium enterprises (SMEs), and industry remains unchanged. However, Agriculture Minister Sharad Pawar has asked the Finance Minister P. Chidambaram to reduce the interest rates for agricultural loans and it remains to be seen if Chidambaram will accommodate this request in his next budget.

The RBI's third quarter review and mild course correction is essentially to calibrate India's monetary policy with those of other Asian countries and to tighten money supply policy. It also reflects the impact of globalization on India where international agricultural commodity price increase is affecting domestic market. Private bankers have widely applauded the RBI policy change as much needed to control inflation arising from supply-side issues and maintain price stability. However, public sector bankers pointed out they would use their discretion on raising benchmark prime lending note rate (BPLR) rates.

By turning down consumption and encouraging savings, the RBI is reducing the amount of money in circulation and those available are spent for economy enhancement activities and not for speculative gain. For industry to be competitive, the RBI must continue to keep interest rates at affordable and competitive levels.

 

 

 

 

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