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'Spurring economic growth is not the RBI's function'

D R Pendse

I read with great interest the announcement made by the Reserve Bank governor with respect to a) review of the macro-economic and monetary developments in 1997-98, b) stance of the monetary policy for 1998-99 and c) changes in monetary and credit policy measures. But I would like to comment only on the first two issues.

Dr Bimal Jalan's statement clearly indicates that most of the economic trends in 1997-98 have been worrying, and things have been going wrong as compared to expectations.

Firstly, when the year started, economists were expecting the Gross Domestic Product to touch 6.5 per cent. But I feel it will not exceed five per cent this year, chiefly because of the zero growth rate in agriculture.

Last year, agricultural growth rate was 7.9 per cent, and this year it is practically zero. Again, last year, industrial growth was about 8 per cent and this year it is up by only six per cent. And interestingly, the service sector's performance too is far below expectations.

On the exports front, the growth is only by 2.6 per cent this year, compared to 5.6 per cent in the previous year. On the other hand, imports have increased by 13.7 per cent, according to Dr Jalan. And, I am talking only about non-oil imports, because oil imports are very essential for the economy. We have to accept this fact. So, we will have to import according to our requirements, there is no other option before us.

In my opinion, industrial growth is not picking up in spite of easy liquidity, largely because of the government's borrowing from banks. And it is interesting to note that though industry is borrowing from banks, they are not utilising these funds for productive use. Also, the fact that money supply which was supposed to be in the range of 15 per cent, has shot up to 17 per cent -- again, this extra money is not being utilised for productive purposes.

Dr Jalan has emphasised in his policy that the industrial slowdown is worrying not only because of its implications for the financial and banking sectors, but also from every single point of view. Given that 76 per cent of the government's revenues come from the industrial sector, when the government does not earn, it has to borrow. This leads to a vicious circle resulting in industrial slowdown. And, I think spurring industrial growth is not the major objective of the RBI or any monetary authority.

The best part of the credit policy is inflation. The governor has been able to keep it under control to five per cent. And in spite of the increase in money supply, Dr Jalan says the lower inflation rate gives him the needed manoeuvre to manage the monetary policy for the next six months without worrying about inflation. Had inflation been very high, he would have found it extremely difficult to reduce the bank rate by one per cent, as he has done.

I feel the money supply has increased because of the increase in foreign exchange assets. Again, this is a disappointing factor, as this increase is less than the previous year's. This year, the foreign exchange assets have grown by 22 per cent, while it grew by 28 per cent last year. So, here too, there is a deceleration in growth.

I think the RBI's main objective is to control inflation and price stability. Spurring economic growth is the function of the industrial sector, agricultural sector, services sector, the GoI -- certainly not the RBI's. I feel that the function of credit policy is not to accelerate economic growth but to control inflation and price stability. Hence I think the RBI should not be criticised if economic growth is low as long as it is controlling inflation.

My overall view is that the credit policy must be complimented because it has been able to keep inflation under control.

D R Pendse, the wellknown economist, spoke to Prasanna D Zore.