BOMBAY — The Reserve Bank of India (RBI) is set to present the credit policy on Oct. 29. Till now, meaning that for the first six months of the current fiscal, the economy has been doing fairly well. India’s index of industrial production (IIP) recorded an overall growth of 4.9 percent in the April-August period of the year 2002. The growth in industrial production was boosted by solid improvements in the key sectors of mining, manufacturing and electricity.
Another piece of good news is that tax collections have spurted by 17 percent during the first six months of the current fiscal (2002-03) to Rs.906.48 billion as compared to Rs.774.80 billion in April-September 2001-02. This was mainly due to higher corporate tax and excise duty collections.
The excellent performance was mainly due to a 21 percent growth in direct tax collections at Rs.297.57 billion during April-September 2002-03, while indirect tax was up by 15 percent at Rs.608.91 billion.
Corporate tax collections till September 2002 was 31 percent of the budget target of Rs.486..16 billion for 2002-03. Income tax collections grew by a modest 11.3 percent to Rs.143.41 billion during April-September 2002-03, managing to attain 30 percent of the budgeted target.
But the concern is now for the further six months as the effects of the scanty rainfall this year will be felt now due to lowered spendings in the rural areas. It would be difficult to sustain this growth rate as the impact of the poor monsoon and hence lower agricultural output will be felt in the second half of the year. This has already been reflected in the poor performance of India’s largest consumer company, Hindustan Lever, which reported a mere 3.5 percent spurt in its net profit for the second quarter ended Sept. 30, 2002 on a 7.2 percent fall in sales. Rural buying is one of the biggest sources of income for the company.
And this has already been seen to some extent in the performance of India’s core sector. India’s core sector showed a growth of a mere 1.7 percent in September 2002, hit by the country’s worst drought in 15 years.
According to figures released by the Commerce and Industry Ministry last week, growth in the infrastructure sector, which covers electricity, coal, steel, crude oil, refinery and cement, had slowed from 4.1 percent in September last year.
Based on these figures, one of India’s foremost credit rating agencies, CRISIL has already pegged down the economic growth at 5-5.2 percent for this fiscal mainly due to the dismal performance of agriculture, which in turn would have some impact on demand for consumer durables and FMCG sectors.
The report put out by CRISIL says that agriculture is expected to decline by about 0.5 percent over the year while industry is expected to grow in the range of 5.5-6 percent and services at about 7.5 percent. Hike in prices of essential food and non-food products, energy and manufacturing products is estimated to push up inflation rate to 3.5-4 percent during the coming months.
CRISIL also projected a higher fiscal deficit due to rise in expenditures on account of drought relief and bailout of financial institutions. It has stated that the center’s fiscal deficit is expected to be in the range of 5.6-6 percent of gross domestic product (GDP), as compared to budget estimate of 5.3 percent. In April, the central bank projected India’s GDP for the year to March would be 6.0 to 6.5 percent higher than in the previous year.
Keeping these facts in mind, the RBI governor is not likely to tamper much with the interest rates and for the current fiscal, the interest rates are expected to remain more or less stable at the current rates.
But given the slowing down of economic growth, a modest rate cut is warranted. A cut would trigger a reduction in rates on loans offered by banks, lower cost of raising funds for companies and help sustain demand in core sectors, such as steel and cement.
The bank rate was last lowered a year ago to a three-decade low of 6.5 percent. There is no doubt that liquidity is abundant in the system. There is excess rupee funds with banks, partly due to the central bank’s dollar purchases, which have boosted foreign exchange reserves to more than $63 billion, up nearly $10 in the past six months.
So one will have to wait and watch whether the bank rates take a dip once again.
— 28 October 2002
