Economic Survey 2012-13: Reflects India's Grim Reality, Cautions Against Growing Taxes

Finance Minister P. Chidambaram presented the pre-Budget Economic Survey for 2012-13 to Parliament on February 27. The Survey reflects the grim reality that India is facing a severe slowdown and must act fast to spur investment, restart stalled projects, cut interest rates and contain its fiscal deficit.

Growth Rate

The Survey made it clear that this fiscal’s five per cent growth, the slowest in the past decade, could no longer be blamed on external factors alone, and the government will have to act on the domestic front to come out of the slump.

The Economic Survey, while projecting an optimistic growth rate of 6.1-6.7 percent for 2013-14, stated that to contain the fiscal deficit the government should widen the tax base and cap subsidies, particularly through better targeting and plugging leakages. It also claimed the downturn was more or less over, and that the economy was looking up. Claiming that the downturn was “more or less over” and that the economy was looking up, the Survey projected a cautiously optimistic growth rate of 6.1-6.7 percent while conceding that the Gross Domestic Product (GDP) growth for the current fiscal was likely to slip to the decade’s low of five per cent — compared to the estimates by the Central Statistical Organisation (CSO) of 6.2 percent for 2011-12 and 9.3 percent the year before.

Fiscal Deficit

The Survey had pegged the fiscal deficit at 5.1 percent for the GDP for 2012-13, which the finance minister later revised to 5.3 in view of the rising expenditure and subdued revenue collection. For the new fiscal, the finance minister has committed to bring it down to 4.8 per- cent.

The 2012-13 Survey notes that the government needs to contain the fiscal deficit especially by shrinking wasteful and discretionary subsidies. The Survey said: "Controlling the expenditure on subsidies will be crucial. The domestic prices of petroleum products, particularly diesel and LPG need to be raised in line with their prices prevailing in the international market.

In addition, delays in getting permissions for projects need to be curbed so that investment can pick up. Implementation of GST, if approved, would create an integrated market and bring more producers in the tax net. Also, the direct benefit transfer scheme recently rolled out on the AADHAAR platform will target subsidies better.

Agriculture Reforms

Economic Survey states that with agriculture growth rate falling short of the four per cent target in the past five years, the country’s annual economic report card (the first since the beginning of the 12th Five-Year Plan period), calls for increase in yields and reforms like a suitable sustainable strategy to maximize agricultural income and make it a viable option.

The farm sector achieved 3.6 percent growth during the 11th Five year Plan (2007-12) – higher than growth of 2.5 and 2.4 percent during ninth and 10th Five-Year Plans but lower than expectations of 4 percent growth target.

Therefore, in the face of stiff challenge of feeding its growing population, the Survey has sought urgent reforms to boost crop yield and private investment in infrastructure to motivate farmers.

Economic Survey for 2012-13 has emphasized putting in place a strategy for farm development in the eastern and northeastern regions amid saturation in crop yields in Green Revolution belt, especially in the States of Punjab and Haryana.

Tax Rate

In what may bring cheer to the well-heeled in the wake of a raging pre-Budget debate over squeezing more out of the super-rich class, the Survey suggested the government’s efforts to raise additional revenue should be through widening of the tax base and not by increasing the rates. The Survey stated: “It is much better to achieve a higher tax-GDP ratio by broadening the base which is taxed rather than increasing marginal tax rates significantly — higher and higher tax rates impinge more and more on incentives to undertake taxable activity, while encouraging tax evasion.”

Several experts, including PMEAC Chairman C. Rangarajan, have pitched for higher rates of taxes on super-rich. The Survey, prepared by a group of economist led by Chief Economic Advisor Raghuram Rajan, said it is better to achieve fiscal consolidation partly through a higher tax-GDP ratio than merely through reduction in expenditure as it would only hurt development spending.

The Tax-GDP ratio touched a peak of 11.9 percent in 2007-08, but declined to 9.6 percent in 2009-10. It was 9.9 percent in 2011-12. “Raising the tax-GDP ratio to above the 11 percent level is critical for sustaining the process of fiscal consolidation in the long run,” it said.

Gross tax revenue in April-December 2012 has grown by 15 percent to over Rs. 6.81 lakh crore. However, the growth in tax collection was “significantly” short of the growth envisaged in Budget. The tax collection until December 2012, was 63.2 percent of Budget estimates, lower than the last five-year average of 69 percent.

Rate of Inflation

Predicting that headline inflation may fall to 6.2–6.6 percent by next month, the Survey stated that elevated food inflation would continue to remain an area of concern as it inched towards double digits in December 2012. While 2012, the inflation was driven by protein items, this year it has been due to increase in prices of cereals such as wheat, rice and maize.

Inflation which is one of the major areas of concern for the United Progressive Alliance (UPA) Government, has remained in the range of above seven per cent since December 2009, while to add to its woes food inflation, too, has remained on the higher side during the same period, and according to the Economic Survey for 2012-13, easy money policy of major developed and developing nations may further aggravate inflationary expectations in India.

The survey further added that inflation has remained muted in the current financial year and declined to a three year low of 6.62 percent in January 2013. The average wholesale prices-based inflation in 2012 (April-December) moderated to 7.55 percent from 8.94 percent in the corresponding period of 2011-12.

Industrial Production

With the spurt in factory output last October turning out to be an aberration in the wake of sharp downturns in the months after, the latest Economic Survey has sought to describe the industrial production scenario as a ‘mixed picture’ of sluggishness bottoming out as well as continuing for a little longer period.

What came as a surprise to the government while India Inc. maintained a ‘we said so’ stance to clamor for easing of interest rates, was that industrial growth, as measured by the Index of Industrial Production (IIP), witnessed a smart recovery with a robust 8.3 per cent expansion in October, 2012.

Despite the downward bias, the Survey has highlighted at least two factors which point to some optimism on the industrial front.

First is the data on frequency distribution of products/product groups within the IIP basket which indicates that the number of products with negative growth has declined from 182 in the fourth quarter of 2011-12 to 160 in October-November 2012.

The second positive factor is the Reserve Bank of India’s ‘Business expectation index’, which showed moderately positive growth during the third quarter of the current fiscal after posting persistent negative growth for the previous six quarters. Since the RBI business index tracks IIP growth fairly closely, the change in trend suggests a possible bottoming out of IIP growth moderation.

Foreign Direct Investment

According to the Economic Survey, Foreign Direct Investment (FDI) in India slumped by 43.3 percent at $15.85 billion in April-November period of the current financial year as compared to $27.93 billion in the corresponding period previous year. The overseas investment flows in top five services declined by 9.7 percent at $8.19 billion during the period under review.

The Survey stated that overall FDI inflows increased by 33.6 percent in 2011-12. Overseas investment inflows in services surged by 57.62 percent in the financial year ended March 31, 2012.

The document presented a day ahead of the Union Budget 2013-14 pointed out that the government has taken many policy initiatives to liberalize FDI policy for services sector. This includes increasing FDI limit from 49 percent to 74 percent in teleports and DTH and cable networks, permitting FDI up to 74 percent in mobile TV, up to 49 percent in scheduled and non-scheduled air transport services and up to 50 percent in multi-brand retail trading.

The Survey stated that the government has also amended the existing policy on FDI in single brand product retail trading.

Health Sector

The country’s spending on health remains abysmally low with the Survey revealing that the spending on health, as compared to the spending on the rest of social services, has actually been declining in the country. Raising alarm over the decline, the survey has called for increased focus on health and education if India's demographic dividend is to be used to its advantage. Between 2011 and 2016, as many as 63.5 million workers, mainly aged between 20 and 35 years, will join India's pool. For this segment to be productively engaged, spending on health and education must remain consistent, the survey says.

But the ground situation paints to a sorry picture. The combined central and state expenditure on social services as a proportion of total expenditure increased from 22.4 per cent in 2007-08 to 25.1 per cent in 2012-13 and the spending on education among all the social services also increased over this period from 43.9 to 46.6 per cent.

However, the combined general spending (federal and states) on health has fallen over the past five years from 21.5 per cent to 19.2 per cent.

Petroleum Subsidies

The 2012-13 Survey has called for addressing the key issues of petroleum subsidies, clarity on gas pricing policy, petroleum price distortion and concerns over various disputes pertaining to the New Exploration Licensing Policy (NELP). It stated that addressing the key fiscal risk of petroleum subsidies is critical in better fiscal marksmanship.

It stated further that the overall subsidy bill of the government, it said, was likely to overshoot the target of Rs.1.79 lakh crore this financial year due to higher crude oil prices. The government had put the petroleum products subsidy at Rs.43,580 crore, food subsidy at Rs.75,000 crore and fertilizer subsidy at Rs.60,974 crore, taking the total subsidy bill to Rs.1,79,554 crore for 2012-13.

Employment Rate

The 2012-13 Economic Survey stated that the employment rate between June 2011 and June 2012 went up by approximately 7 lakh led mainly by the IT and BPO sector which accounted for almost half of the increase. It stated that upward trend in employment since July 2009 continues despite the economic slowdown.

A sector wise analysis shows that the textiles sector including apparels saw 1.70 lakh job additions, followed by transport sector (0.45 lakh), metals (0.26 lakh), gems and jewelry (0.19 lakh) and automobiles (0.11 lakh) in June 2012 over June 2011.

The survey said that employment in handloom/power loom and leather sectors has marginally declined during this period.

It said that there has been a sustained and consecutive increase in employment in both the public and private sectors covered at overall level during the last eleven quarters with a total addition of 30.73 lakh employment during this recovery period.

According to the Survey, India is on the brink of a demographic revolution with the proportion of working-age population between 15 and 59 years likely to increase from approximately 58 per cent in 2001 to more than 64 per cent by 2021. Moreover around 63.5 million new entrants to the working age group between 2011 and 2016, the bulk of whom will be in the relatively younger age group of 20-35 years.

The Survey added that the annual growth rate of employment in the private sector in 2011 was 5.6 per cent whereas that in the public sector was negative.

Communique of Communist Party of Vietnam's Central Committee

The 12th Plenum of the Communist Party of Vietnam Central Committee (CPVCC), 10th Tenure, has convened in Hanoi from 22 to 28 March to continue its discussions on important issues in preparation for the upcoming 11th National Party Congress. Secretary General Nong Duc Manh has presided, opened and closed the conference.

Strategy for National Construction
The CPVCC has discussed draft documents of the 11th National Congress after having considered the opinions collected from the 11th CPVCC plenum, former leaders of the Party and the State, leaders of provincial and municipal Party Committee (PC), CPVCC organizations, experts and scientists.

The documents discussed include: the Political program for national construction in the transition to socialism (complemented and developed for 2011); the 10-year (2011-2020) Strategy for socioeconomic development; the Political Report of the CPVCC (10th tenure) at the Party's 11th National Congress; the Report on the implementation of Party Rules and recommendations for supplements and amendments; recommendations for the completion of draft documents before announcing to party congresses at all levels and the people for their opinions.

Major Issues and Implementation
The CPVCC has also discussed on the orientation for the personnel planning of the CPVCC of the 11th tenure; the number and partition of delegates to attend the 11th National Party Congress and several other issues.

1. The CPVCC has revised the whole draft Political Platform for National Construction During the Transition Period to Socialism (to be complemented and developed in 2011) with the emphases on: the social characteristics of the socialism that our people are building and our general objective when the transitional period ends; basic orientations; the position and role of different economic sectors during the transition to socialism in our country.

2. The CPVCC has revised every aspect of the draft of the 10-year (2011-2020) Strategy for Socioeconomic Development and concentrated its discussions on the defining of the goals of the Strategy with the development concepts and breakthrough stages as well as the different orientations and development measures.The main theme of the Strategy is defined as: To continue the boosting of the industrialization and modernization process with rapid and sustainable development by mobilizing the entire nation's strength to transform our country basically into a modern industrialized country. On the implementation results of the 2001-2010 Strategy for socio-economic development, the draft Strategy evaluated that: After 10 years of implementation of the 2001-2010 strategy, we have greatly achieved important results by bringing the country out of the less developed situation with the successful implementation of essential targets of the Strategy.

3. The CPVCC has discussed and basically endorsed the draft Political Report while adding some recommendations on the following important issues to perfect the draft:The theme of the Political Report and overall objectives during the term of the 11th Congress approved by the CPVCC will be: To strengthen the capacity of the leadership and combative spirit of the Party, bringing into full play the nation's strength and pushing forward the comprehensive renewal work to lay the foundation for our country to basically become a modern industrialized country by 2020. Based on preliminary estimation, the draft Political Report has presented a number of important growth targets for the five-year period of 2011-2015 with an average annual Gross Domestic Product (GDP) growth rate at 7-8 percent and an average GDP per capita of $2,100 by 2015, which is 1.7 times of that of 2010.

4. The CPVCC has discussed and gave recommendations to the Report on the Implementation of Party Statute of the 10th Party's tenure and the proposals for complements and amendments; the Report on the Personnel Plan for the 11th tenure CPVCC and the number and representation allocation of delegates from the Central Party Committee to attend the 11th Party Congress.

Assessment

At the 12th Plenum, the CPVCC also reviewed, approved and proposed some additional opinions on the representation allocation and total number of delegates to participate in the 11th Congress and several other important issues.

The CPVCC called on the entire party, people, and Army to strive arduously to weather all difficulties and challenges to successfully implement the 2010 socioeconomic development targets and the 10th Party Congress's resolution; to organize with success all the big national celebrations in 2010 and the party congresses at all levels and finally, to contribute valuable opinions for the finishing of the congress's documents as well as to ensure the great success of the upcoming 11th Party Congress to be held at the beginning of 2011.

ASEAN-China Free Trade Area

Ever since the formation of ASEAN-China Free Trade Area at the beginning of this year, the business enterprises in some ASEAN countries have come out with opposing voices. In response, China's Minister of Commerce Chen Deming gave an encouraging boost to formation of the ASEAN-China Free Trade Area by highlighting the fact that after the formation of ASEAN-China Free Trade Area, the trade advantages of this Agreement bought to China and ASEAN have increased drastically.

ASEAN Export to China
Addressing a press conference, held after the CPPCC (Chinese People's Political Consultative Conference) and the NPC (National People's Congress) joint sessions, China's Commerce Minister Chen Deming pointed out the fact that since the formation of ASEAN-China Free Trade Area, for the month of January alone, China's export to ASEAN has increased by 52.8 percent and ASEAN's export to China during the same month of January has increased by 117.3 percent.

He said that in fact the growth of ASEAN's export to China was much faster than China's export to ASEAN nations. China's Commerce Minister Chen Deming stressed that these statistics have proven that the ASEAN-China Free Trade Area was a win-win arrangement type of trade framework.

Annual Trade Growth Rate
In retrospect, Minister Chen Deming said China and ASEAN took ten years to negotiate and seal the ASEAN-China Free Trade Area. It was China's first negotiation for a free trade area with other countries. He said that until today, the ASEAN-China Free Trade Area is still the largest free trade area China works with developing nations. The free trade area covers a total population of close to 1.9 billion people.

Before the seal of the ASEAN-China Free Trade Area agreement, China and ASEAN have already promoted the "early harvest" bi-lateral cooperation framework between the two parties to achieve an annual trade growth rate of 18.2 percent per year. Minister Chen Deming pointed out that from such trade development; it was suffice to illustrate the strong complementary nature of the two major markets' industrial properties and trade opportunities.

Nevertheless, Minister Chen Deming also admitted that at this initial period of the formation of ASEAN-China Free Trade Area, some weaker enterprises in ASEAN countries, especially the small and medium size enterprises might be affected by the agreement. However, with the bi-lateral industrial properties within the Free Trade Area of ASEAN and China begin to boost up and with the competitiveness between the two sectors continue to expand, the benefits of ASEAN-China Free Trade Area would clearly reflect regional economic prosperity and stability.

Beyond Framework Pact
Minister Chen said that at the same time, China would, as a newly emerging developing country with vase land area and large population, also play the facilitator's role and pay close attention and look into the need of the weaker enterprises in the ASEAN countries. Minister Chen said that beyond the framework of the ASEAN-China Free Trade Area, China would also consider provide assistance and support to the weaker small and medium size enterprises in some concerned ASEAN member nations. For example, China could make arrangement for China's industries along the coastal provinces of China that have same or similar industries as in ASEAN countries to go to some of the ASEAN nations to carry out cooperation partnership and investment there. The purpose is to help improve the work process ability and level of the weaker industries in some of the ASEAN member nations.

Minister Chen Deming also disclosed that China was also prepared to help ASEAN nations to improve their basic infrastructure, the level of goods circulation and to help in the promotion and enhancement of ASEAN member nations' competitiveness in international market and trade.

Implementation of Zero Tariff Policy
After years of preparation, the ASEAN-China Free Trade Area was finally formed on 1 January 2010. However soon after its formation, the business enterprises in Indonesia, Thailand and other countries have come out with protest noises. Indonesia's business community is concerned that the low-cost imports from China will result in unfair competition with its local industries.

The Indonesian Government has sent an official letter to the ASEAN Secretariat and requested postponement of the implementation of zero tariff policy for quite a lot of its products for one more year. Indonesia wants the effectiveness of the ASEAN-China Free Trade Area Agreement to take effect only on 1 January 2011 in order to give its local businesses and enterprises to have more time to adjust to the zero tariff policy between China and ASEAN member nations.

Fiscal Discipline, End of Corruption To Make India World Leader

In the annual economic survey presented in the Parliament on 25 February giving an indication of new spurt in economy, it has been said that in the next four years, India would become the fastest-growing economy of the world. At the moment, it is the second fastest-growing economy of the world, after China.

Growth Rate
Analysts believe that in the coming years, India would leave behind China in this matter. This is also being confirmed by development-related figures of the economy. Despite recession, the country's economy registered a growth of 6.7-percent during 2008-09. During 2009-10, the growth rate is expected to be around 7 to 7.5-percent, and during 2010-11, it is estimated to be around 8 to 8.5-percent.
The government would have to strengthen its fiscal condition so that the county's economy could become the fastest-growing economy of the world, and would have to give proper direction to government spending. Apart from this, it would also have to review the big dose of concessions given to industries to deal with global recession, and to provide momentum to the economy.
Most industries have not only as come out of recession now, they are also growing with considerable speed. Such industries do not need any kind of stimulus now, but those industries that have not yet fully recovered from recession do need it partially. After some time, when their condition improves, these incentives could also be withdrawn. Some incentive certainly needs to be given to those industries where the pace of investment is still slow.

Improve Infrastructure Facilities
To become the fastest-growing economy of the world, it is also very necessary to improve infrastructure facilities in urban and rural areas, and to end corruption at administrative level. We cannot imagine development without infrastructure facilities i.e. electricity, roads, and rail. There is no doubt at all that if the country could be freed from rampant corruption prevailing at the government level, we would not only become the biggest economic power of the world, but could also become a global superpower in other fields as well. Some of our people have amassed illegal wealth in the Swiss banks in huge quantities.
With that, we could not only repay all our foreign debt, but would also be in a position to lend money to others. If that happens, we would be able to easily deal with the curse of price rise and poverty.

India's Growth Rate

The trend of rapid improvement in the Indian economy continues, which becomes clear from the growth rate of industrial production. In October 2009, the growth rate was 10.4 percent and it became 11.7 percent in November 2009.
It is good that the growth rate of the manufacturing sector is 12.7 percent. In durable consumer goods, the growth rate was 37.3 percent, which means that the fear of recession has vanished from consumers' minds, and a sense of self-confidence and security has come back.
The good news is that export too, has started showing growth after a long time. Everyone agrees that in India's journey of growth, global recession would will only prove to be a hiccup, and India would will soon tide over it. But we would will have to learn a few lessons from the recession and have to make a few fresh beginnings.

Biggest Challenge
The biggest challenge before us in the coming days is to become a superpower in the manufacturing sector. At present, the service sector has a big share in India's growth, but we would will have to concentrate on the manufacturing sector for continuous growth.
Obviously, we cannot make industrial progress like China as a democratic society has its own limitations. Though industrial development in a democratic society is a bit slow, it is sturdy. Secondly, people have bigger partnership in that development. Even now, the basis of our industrial development is domestic demand, which means that Indians are benefiting from industrial development.
The development at a more extensive level is necessary so that this demand keeps on growing, and large-scale efforts are necessary for development of the agriculture sector. Along with making agriculture profitable, it is necessary to reduce people's dependence on the same.

Manufacturing Sector
Only the manufacturing sector has the capacity to create jobs on a large-scale. The government's policies and the Reserve Bank of India (RBI) have played an important role so far in coming out of the recession.
At the beginning of the New Year, we are at the point where the process of emerging comes to an end and the process of picking up speed begins. Let us hope that the government's policies would continue to provide impetus to this process in the future also.

Faulty Management Cause of Growth-Inflation Imbalance

In November, the inflation rate rose to 4.78 percent, and it has created several complex problems for the government. In itself, this inflation rate is not dangerous, but the circumstances under which this rate has been recorded rings a danger bell.
For the past some time, the inflation rate was quite low due to recession, but whatever was the rate was due to sudden rise in prices of very essential food items.

Pressure on RBI
The inflation rate in respect of essential food items has reached 20 percent pushing up the overall inflation rate. The problem is that the government does not have any immediate remedy to reduce prices of essential food items. There is growing pressure on the Reserve Bank of India (RBI) to increase interest rates, but there is danger of it adversely affecting the improvement in economy. Second, how effective would the monetary steps be on price rise due to shortage of food items is also being argued continuously.
The manner in which we run our economy is still quite old fashioned. The RBI would certainly take some steps to reduce cash, but the question is when? The government could certainly make some efforts to increase availability of food items, but arresting this price rise can take place only be after the Rabi harvest comes.

Result of Mismanagement
In fact, price rise in essential food items because of shortage that we are suffering from is the result of mismanagement of past several years. While the growth rate has increased due to development in service and industry sectors, the agriculture sector still stands where it was. We don't have any plan for long-term needs.
Food items of our everyday need also keep going through the vicious cycle of less production, more prices and more production, less prices. If a big country like ours would leave its agriculture on the vagaries of the market and the monsoon, crisis will be created.

Affecting Price Hike
There has been less rain this year and prices of pulses have gone up. More pulses would be produced next year and the prices would fall. But when growing pulses would become a less profitable proposition and the rains would be good, farmers would again reduce growing pulses.
The present crisis toward the end of the first decade of the 21st century is warning us that it is necessary to pay attention to agriculture, otherwise people would keep suffering from price hike, and policymakers would continue to work out the complex arithmetic of growth and inflation rate.

New Monetary and Credit Policy (2009-10)

The Reserve Bank of India (RBI) in its Annual Monetary and Credit Policy for 2009-10, released on April 21, 2009, slashed the Repo and Reverse Repo Rate by 25 basis points each. This could result in home and auto loans becoming cheaper. The RBI reduced the Repo Rate to 4.75 per cent and Reverse Repo to 3.25 per cent with immediate effect, while retaining other key rates like the cash reserve ratio, the percentage of deposits that banks keep with the central bank.

Banks have the apprehension that reducing deposit rate could shift deposits to post office saving instruments, which for some banks are not valid, while for some it is, the policy stated. In the wake of RBI policy cut, bankers have hinted that there could be reduction in lending as well as deposit rates.It is a signal to bankers to cut rates. Interest rate has already come down and it should soften further.

Since mid-September 2008, the RBI has cut the Repo Rate by 400 basis points and the Reverse Repo Rate by 250 basis points. The Cash Reserve Ratio (CRR) was also reduced by 400 basis points.

Support to Stabilize Economy
The RBI noted that its efforts under the monetary policy in 2009-10 would be to ensure a policy regime that enables credit expansion at viable rates while preserving credit quality so as to support the return of the economy to a high growth path.

The apex bank noted that India too has suffered the impact of the global financial crisis to degree far higher than expected. The extent of impact has caused dismay, mainly on two grounds: first, because our financial sector remains healthy, has had no direct exposure to tainted assets and its off-balance sheet activities have been limited; and second, because India’s merchandise exports, at less than 15 per cent of the GDP, are relatively modest, the RBI stated.

The RBI noted that the immediate challenges before it included supporting the drivers of aggregate demand to enable the economy to return to its high growth path, boosting the flow of credit to all productive sectors of the economy, ensuring an orderly withdrawal of the large liquidity injected in the system since September 2008 by the RBI to support the economy's productive requirements; and the continued challenge of preserving the stability of our financial system drawing from the lesson of the global crisis.

Foreign Banks Policy
The RBI in its policy stated that it would not hurry with the proposal to liberalise operation of foreign banks in the country in the wake of the global financial meltdown. The existing policy would continue, RBI stated.

Growth Rate
The RBI policy also forecast the Gross Domestic Product (GDP) growth at six per cent for the financial year 2009-10, while the rate of inflation was seen at four per cent by March-end. The regulator also projected credit growth and deposit growth at 20 per cent and 18 per cent, respectively.

Deposit and Lending Rates
Following several cuts in key policy rates by RBI, all public sector banks, most private sector banks and some foreign banks have reduced their deposit and lending rates. The reduction in the range of term deposit rates between October 2008 and April 18, 2009 has been 125-250 basis points by public sector banks, 75-200 basis points by private sector banks and 100-200 basis points by five major foreign banks. The reduction in the range of BPLRs was 125-225 basis points by public sector banks, followed by 100-125 basis points by private sector banks and 100 basis points by five major foreign banks.

However, these reductions in lending rates have not spurred lending activities. In fact, during 2008-09, the growth in non-food bank credit (year-on-year basis) decelerated from a peak of 29.4 per cent in October 2008 to 17.5 per cent by March 2009.Substantially lower credit expansion by private and foreign banks also muted the overall flow of bank credit during the year, the policy stated. Given the wide dispersion of credit growth noticed across bank groups during 2008-09, banks with strong deposit base should endeavour to expand credit beyond 20 per cent.

Benefits for Interest on SB Accounts In another move that could boost small savings in the country, the RBI has proposed that the payment of interest on saving bank accounts by scheduled commercial banks be calculated on daily basis.

At present, interest on saving bank accounts is calculated on the minimum balances held in the accounts during the period from the 10th day to the last day of each calendar month.It is proposed that payment of interest on saving bank accounts by scheduled commercial banks would be calculated on a daily basis with effect from April 1, 2010, RBI stated in the annual policy statement 2008-09. This would mean depositors would earn interest on all the 30 days on a daily basis.Several banks have suggested that interest rate on savings bank accounts may be either calculated on minimum balances in deposit accounts during the period from first to last day of each calendar month or on a daily basis.

Opening ATMs without Approval

After allowing customers of free usage across all ATMs, the RBI has now allowed banks to set up offsite ATMs without prior approval. It is proposed to allow scheduled commercial banks to set up offsite ATMs without prior approval subject to reporting, the credit policy stated. These moves could help customer make more use of ATM services.Earlier, the RBI allowed customers to withdraw cash from any ATM without any charge irrespective of the fact whether they hold ATM of that bank. Banks will not levy any fee on cash withdrawals using ATM and debit cards issued by their counterparts.

The RBI also proposed to constitute a group to review the framework of branch authorization policy with a view to providing greater flexibility, enhanced penetration and competitive efficiency consistent with financial stability.

Assessment
The RBI’s approach has been to watch and wait and nudge banks towards reducing their rates rather than aggressively cutting rates. If in response to this policy move, banks do move and cut rates, the RBI should cut rates further in the coming weeks. It should also cut the CRR, which is a tax on the banking system and needs to be removed, especially at a time when bank balance sheets are going to be under stress.

In fact, the reduction in the short-term lending rate by the RBI in as many months is accompanied by widespread pessimism that it is not percolating to the end user. The repo rate, at which the central bank lends overnight money to banks, at 4.75 per cent is now half of what it was in October 2008. The increased liquidity is being used by risk-averse banks to lend mainly to their most credit-worthy borrower: the government. Since October 2008 growth in bank lending to companies and individuals has slowed from 15 per cent to three per cent in March 2009.

The expansionary fiscal policy is likely to result in a GDP growth rate of six per cent in the year to March 2010. The first officially articulated projection, in the RBI’s annual policy statement, is justifiably cautious. It should come as some comfort that Mint Road has not had to look for options beyond interest rates at this stage of the game.