New challenges for the government
|
Larger demand for credit, liquidity squeeze and inflation are major concerns
|
The paradox of high world prices for commodities and a boom in precious metals when crude prices also are at record levels cannot be easily explained.
A PIQUANT situation prevails in the money, gilt-edged and commodity markets with world crude prices also at high levels. With a keen demand for funds and a steady but slow rise in interest rates in western countries, banks have to intensify deposit mobilisation while trying to ensure reasonable margins with a better balance between rising deposit and lending rates.
As the U.S. Federal Reserve has raised its discount rate to 5.25 per cent and the Reserve Bank also has jacked up further its repo and reverse repo rates, banks have been raising deposit and lending rates selectively.
As the Central and State governments too have to increase their borrowing at higher coupon rates, there is a scramble for bank assistance from different classes of borrowers.
At the same time, even with no pronounced increase in demand for funds at prices that prevailed in 2005-06, the lenders will have to face new challenges, as expansion of credit will be larger because of higher cost of inventories all round.
Intriguing trends
The squeeze in the money market may thus intensify in the coming months, especially as deposit growth may not improve much, judging by the experience of April-June. The trends in deposits, investments and bank credit up to June 9 are somewhat intriguing. Fresh deposits have come down to Rs. 35,750 crore against Rs. 82,958 crore in the same period a year ago.
On the other hand, fresh investments in government and other approved securities were higher by Rs. 31,193 crore against a net decline of Rs. 2, 536 crore comparably, while credit expansion has been a low Rs. 3,489 crore against Rs. 50,379 crore. In the 12 months ended June 9, 2006, of course, the growth in deposits was encouraging at Rs. 3,61,642 crore against Rs. 2,34,955 crore.
The increase in investments was less pronounced at Rs.12,030 crore against Rs.18,966 crore.
The credit-deposit ratio thus rose to 70.43 per cent from 64.54 per cent and 56.07 per cent in the two previous years, while the investment deposit ratio declined sharply to 34.91 per cent from 41.31 per cent and 46.35 per cent. Surprisingly in the current financial year up to June 23, the Centre's net borrowing was higher at Rs. 52,000 crore against Rs. 42,000 crore comparably. Higher yields on new loans alone cannot explain the increased support for gilt-edged securities.
Rising prices
The main worry of the planners and the Central and State governments is to prevent a sharp rise in prices and minimise the subsidy burden, which threatens to upset the Finance Ministry's calculations.
Foodgrains output in 2005-06 season which ended in June has been much higher by 11.60 million tonnes at 210 million tonnes. There has, of course, been no distinct improvement in pulses output. But the yields of coarse and fine cereals have been satisfactory. As the performance of the agricultural sector has been commendable in the 2005-06 season and the outlook for the next season also is promising, there should be a softening trend in open market prices for select commodities.
However, judging by the spurt in prices for wheat and coarse cereals as well as pulses, it is imperative to initiate measures that will aid faster growth in farm output, particularly in wheat and pulses. There is also brisk offtake of sugar in spite of higher prices though output has been rising in the current crushing season.
The Government's efforts to contain prices with liberal import of wheat and pulses and a ban on exports of pulses and sugar (except where there are export obligations) may not have the desired impact. This is because the landed cost of imports is higher than Indian parity.
With the Finance Ministry also feeling compelled to raise prices for gasoline, diesel and even cooking gas and kerosene sold through fair price shops, inflationary pressures will get intensified. It may not be surprising if the inflation rate rises to 6 per cent and above in the absence of a softening of world crude prices and a distinct improvement in global output of foodgrains and sugar.
The inflation rate has already risen to 5.44 per cent in the week ended June 17 from 3.59 per cent at the end of April.
The Finance Ministry's calculations may get upset as its efforts to secure additional resources through disinvestments and reduce subsidies cannot be effectively implemented because of the opposition from the Left parties and even some participants in the coalition government.
Even the recent upward price hike for gasoline and diesel has met with strong resistance from the Left parties and even the Congress ruled States have had to adjust sales tax rates to provide some relief to consumers. Against this background, will it be possible to raise further selling prices for all the subsidised petro products?
It is therefore being discussed in stock market and industry circles whether it will be possible to sustain the growth in GDP at 8.0-8.5 per cent, especially as the required financial resources in various forms cannot be secured as FIIs and other financial institutions may divert their funds to other countries where interest rates are rising steadily.
The secondary and primary markets have been witnessing volatile trading conditions and different views are being expressed about the scope for a further rise in prices for even equities with assured prospects and the prevalence of buoyant conditions in the primary markets.
Current account worries
Significantly, borrowing by industrial enterprises and even banking institutions keen on securing large resources has been in the form of foreign currency loans, ADRs and GDRs.
This perhaps explains why the growth in foreign exchange assets in the past few months has been sizable even with the current account deficit being higher at $10.61 billion, despite the emergence of a surplus of $1.82 billion in January-March 2006 against $159 million in the same period in 2005.
If the oil import bill turns out to be costlier and non-oil imports too rise significantly, the trade gap may get widened as also the current account deficit, notwithstanding a continuing rise in net invisible receipts.
Thus the paradox of high world prices for commodities and a boom in precious metals when crude prices also are at record high levels cannot be satisfactorily explained, though it is felt that economic growth in the U.S. and elsewhere may slow down and oil importing countries also will feel severely the cumulative impact of the burge- oning oil import bill.
P. A. SESHAN
Printer friendly
page
Send this article to Friends by
E-Mail
Business
