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The Rediff Business Special/The most lauded subject issue in '99

Economy: Entering the new millennium in comfort

India enters the new millennium with much comfort as far as economic fundamentals are concerned.

Several positive indicators not only kept the critics silent but also created the much-needed confidence among the investors and regulators. They are:

• A low level of inflation
  
• Reasonably good foreign exchange reserves
  
• Stable rupee exchange rate
  
• Downward trend in interest rates
  
• Comfortable liquidity in the system
  

Economists and observers have started revising up the country's gross domestic product growth rate above 6.5 per cent.

The year 1999-2000 was a turmoil year for India both politically and economically. The economic sanctions by the USA and other nations following Pokhran nuclear tests in May 1998, the Kargil border conflict with Pakistan, the fall of Vajpayee government at the Centre, declaration of fresh Lok Sabha election, spurt in petroleum prices abroad, killing of missionaries and the super-cyclone in Orissa have put enormous pressure on the Indian economy. An economic disaster seemed imminent.

However, India withstood the pressure, thanks to the efforts of officials, bankers and economists. They regulated various short-term and long-term factors in the economy within the fiscal targets.

In fact, the recent international meeting of the G-20 at Berlin, it was acknowledged that India's external debt management policy was exemplary. The group of 20 nations have toned down their voices on the issue of convertibility of currency on capital account, and avoided speaking on providing absolute freedom to the flow of capital.

The western economic pundits have shifted their focus from free flow of capitals across the globe to organisational reforms within the country. They are not advocating any new institution like the World Development Council and instead are for a change in attitude of existing bodies like the International Monetary Fund and World Bank.

In India, the conservative policy of the authorities got a boost following the experiences gained from the Southeast Asian currency crisis and kept the rupee's capital account convertibility at the bottom of the priority list of reforms.

The officials now preferred to bring in organisational changes in banks, financial institutions and corporate bodies before making any advancement in the policies.

"We will have to follow the international capitalisation norms as soon as possible to face the foreign competitions," a leading banker said.

The sincere efforts by the government to strengthen its state-owned banks through recapitalisaton of funds, without giving much autonomy in functioning of these banks, could not bring the desired results. For there were agitations by bank employees and institutions against the privatisation policy of the government.

Contrary to the privatisation objective, several loss-making old private banks were merged with public sector banks during the year while a few new private sector banks could not survive on their own and decided to merge themselves with large reputed private banks.

TimesBank merged with HDFC Bank. Talks are on to merge Centurian Bank and the Bank of Punjab with big ones like IDBI Bank and ICICI Bank. The Bank of Sikkim has been merged with the Union Bank of India. The State Bank of Banares was merged with the Bank of Baroda.

The year witnessed passage of insurance bills in Parliament and dilution of government holdings in banks and state-owned industries.

The officials in the central bank are convinced that no amount of incentives could improve the performance of banks and institutions unless they are given functional and operational freedom by their owner -- the government.

In fact, the Reserve Bank of India is thinking on the lines of withdrawing its ownership equity holding from the State Bank of India, National Housing Bank and NABARD in order to identify itself only as monetary and supervisory authority.

The RBI is also in favour of providing full freedom to bank managements in disclosing the names of wilful defaulters of bank finances. Recently, it has advised the banks to include a clause in the new loan agreement form whereby the banks would be legally free to disclose the names of its borrowers and defaulters.

However, sources said that the RBI is not in favour of handing over the country's debt management to any other institutions since this is a crucial area of the economy that determines the flow of money and movement of interest rates.

In India, where the government is posting huge fiscal deficts, the central bank must have the dual responsibility as monetary authority as well as debt management authority.

Economists felt that the RBI must manage the country's debt obligations as long as the government incurred larger expenditure against its earnings, leading to fiscal deficits. They expressed concern over the way the government is borrowing funds at reasonably high interest rates from the markets.

In the current year (1999-2000), the government borrowings will go up by Rs 200 billion from the budgetary target. The additional borrowing mostly funded by the state-owned banks, will impact the flow of liquidity in the system.

Despite these, the domestic economy during the year has done well as the flow of foreign institutional investment intensified on the exchanges pushing the BSE Sensitive Index to near 5000-mark; industrial production spurt by over 8 per cent and the Consumer Price Index which was hovering at 16 per cent in the past, has come down to 6 per cent this year.

Observers felt that the coming year would witness hectic mergers and acquisitions among the private sector institutions and units while the government would be under pressure to provide a free working environment for its banks, institutions and corporations.

UNI

OTHER YEAR-END REPORTS

Passenger car, mobike segments drive automobile segment

Stock-market: Bulls greet Y2K by catapulting Sensex beyond 5K

Banking: from making choices to second generation reforms

Business