The Hindu : Rebound in farm output spurs economic growth

Online edition of India's National Newspaper
Monday, Nov 17, 2003

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Business

Rebound in farm output spurs economic growth

With the need to market bumper crops and the compulsion also to intensify procurement purchases of rice and wheat, there should be a larger demand for funds henceforth.

CONTRARY TO expectations in industry, stock and money market circles, Y.V. Reddy, the new Governor of the Reserve Bank, has adopted a different approach while finalising the contours of the credit policy for the busy season.

The absence of any change in the Bank Rate as well as the Cash Reserve Ratio (CRR) is due to the anticipation that the expected sharp recovery in agricultural production will help in setting new records in several directions.

Unlike in the 2001-02 record season, when foodgrains output increased to 212 million tonnes from 196.80 million tonnes earlier, with no significant improvement in oilseeds and cotton, a balanced growth in agricultural output is expected this year. The availability of oilseeds, raw cotton and pulses will be improving significantly which will help reduce imports of oilseeds and pulses while enhancing the prospects for export of cotton.

Industry too fares well

With industrial output managing to rise even in 2002-03, in the face of severe drought conditions in several States, the performance in the current financial year should be encouraging and the growth under this head may be 6.5-7.0 per cent in a whole year against 5.8 per cent comparably.

With software exports rising steadily along with the likelihood of a larger contribution by other invisible exports of the services sector, it is estimated that the Gross Domestic Product (GDP) may rise by 6.5-7.0 per cent even according to RBI, while other sources place the growth at 7.1 per cent and more.

It has, therefore, been emphasised that lower interest rates are not necessary to aid the process of recovery. However, the U.S. Federal Reserve has recently decided against an increase in its discount rate, now at an all time low of one per cent. It is felt that the U.S. economy will stage a brisker recovery in the last quarter of this year and subsequently.

The monetary authorities in India, however, feel that changes in the Bank Rate can be effected at any time while there is no immediate need for reducing the CRR, as banks are flush with funds.

In fact, out of the incremental deposits of Rs. 1,04,988 crores up to October 17, investments in government and approved securities accounted for as much as 83.58 per cent. Even with a brisker growth in incremental deposits, the share of incremental investments in the same period in 2002-03 was only 56.50 per cent.

Busy season may be lively

With sizable lendable resources, banks have been lowering deposit and lending rates. With the need to market bumper crops and the compulsion also to intensify procurement purchases of rice and wheat, there should be a larger demand for funds henceforth. As there will also be an increase in rural disposable incomes and the demand for various types of manufactured goods may grow faster, the current busy season, which commenced from November 1, may be more lively than its predecessor.

On the basis of the growth in credit offtake in November-January, the monetary authorities may have to lower the CRR and the Bank Rate as well, if the inflation rate dips to around 4 per cent.

With the heady inflow of forex resources along with a sharp rise in deposits of NRIs and others in external accounts and also a higher volume of foreign direct investments, forex reserves have increased by as much as $17.17 billion in the current financial year upto October 31. Even allowing for the slight exaggeration in dollar terms, thanks to the depreciation of the dollar, net additions to foreign currency assets have been sizable and the $100-billion mark may be surpassed by January-February.

In the bargain, the rupee has been firm around 45.41. It had been expected that the RBI would adopt new measures for slowing down the growth in forex reserves. However, no new measures have been announced immediately and only borrowers seeking to raise foreign currency loans have been asked to take full hedge cover, if the loan amount exceeds $10 million.

Boom in bourses

In spite of the spurt in the BSE Index to 5135 on November 4 and the bout of profit taking experienced subsequently, the BSE index finished at 4911.76 on November 15. A noteworthy feature of trading on the bourses is the disposition of FIIs particularly to realise profits at the bulges and replenish their portfolios when there is a drop of over 100 points in the indices from the recent highs. It is pertinent to point out here that the improvement in equity values in April-November by over 60 per cent has taken place in an entirely different manner.

Since the results of many reputed companies for the second quarter of 2003-04 have been impressive and there may be a further improvement in corporate earnings in October-March with larger demand for goods and services even at higher prices for different products, the boom in bourses may well be sustained, though institutional investors have been careful to realise a portion of the profits at every major bulge in the indices.

The buoyant conditions in the secondary markets are getting reflected in the improved sentiment in primary markets and many banks and industrial enterprises are finalising their plans for raising additional resources in various ways on advantageous terms.

The decision of the Central Government in respect of the disinvestment of equities in select enterprises will, of course, depend on the outcome of the forthcoming Assembly elections and to the Lok Sabha next year and the attitude of the new members of Parliament to the dilution of government ownership in select enterprises.

Meanwhile, the Central Exchequer may succeed in boosting collections of indirect taxes and even exceeding the Budget estimates of revenues through direct taxes.

Any bulge in the fiscal deficit will be only due to swap operations or those relating to restructuring of State loans. It has, thus, been decided again to repay foreign loans to the extent of $2.6 billion earlier than the dates of maturity to the World Bank and the Asian Development Bank. This will necessitate the issue of fresh rupee loans. Efforts are also being made by the Finance Ministry to realise the Budget estimate of Rs.13,200 crores under the disinvestment programme.

P. A. Seshan

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