The month of August witnessed several important events having serious economic implications. The first was the economic outlook report of the Government of India for the year 2008-09. This report gives mixed indications on economic front?the overall picture is not very healthy. The highlight of the report estimates the economy to grow at 7.7 per cent in the next year as against nine per cent in 2007-08. The growth in agriculture sector is to fall at two per cent as against 4.5 per cent last year. These are because of sharp inflation in global commodity prices and tightening in credit following sub-prime crisis in the US. These factors are leading to lowering of growth and causing pressure on our fiscal system through larger subsidy bills and supply constrained in physical and social infrastructure like electricity, water, road/rail transportation and agriculture. The investment rate is expected to remain the same, but savings are projected to decline. The capital inflows are also expected to fall to $70.9 billion from $108.03 billion last year. Inflation will remain the prime cause for concern in spite of all the efforts of the government. The government is also faced with an uphill task on the fiscal front. Its fiscal deficit targets will overreach from growing off-budget liabilities, which are estimated to be at five per cent of GDP.
India'shigh credit growth is a cause of concern, according to IMF'slatest Global Financial Stability report, and is one of the areas of potential concern. It said that swapping dollar debt for yen, which led to the forex derivative mess, is although high, but manageable and not a cause for concern. In its report, it said that even after some efforts made by the central bank to rein in loan growth through a series of monetary and prudential measures, credit continues to grow at close to 25 per cent. In order to arrive at risks in the financial markets of the emerging market economies, IMF assessed fundamental conditions in those countries that are separate from those related to sovereign debt. One of the major indicators that are looked at is the growth in bank credit. Other indicators are the current account deficit as a percentage of GDP, the ratio of bank credit as a percentage of GDP and external position as percentage of GDP. Though there is no potential threat on other parameters for India, credit growth poses a potential threat.
Under this background, there was some relief to the exporters when rupee breached 44 marks. This is good news for exporters but importers specially oil companies will have to face the pain of expensive dollars. According to a Nasscom study, this trend will help software company'searnings. The Indian software sector is expected to register 10-fold increase in revenues over the next seven years.
The government announced on August 15 a change in the provident fund investment policy wherein the government has allowed private sector-managed provident funds and superannuating trusts to have greater exposure in stock markets. They can now directly invest up to 15 per cent of their investible funds in shares of companies on which derivatives are available in BSE and NSE. The other changes made in the investment pattern include merger of central government securities, state government securities and units of gilt mutual funds into a single category and allowing investment up to 55 per cent of the investible funds; providing a flexible ceiling for various category of instruments, instead of fixed investment ceiling as at present. This policy change will provide more liquidity to the equity market, but allowing private players to manage provident fund investment in capital market is dangerous.
(The writer can be contacted at: gopalagarwal@hotmail.com)
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