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Slowdown to affect savings, GDP growth rate will be 4.5 pc in 1999-2000: I-Sec paper

A protracted economic slowdown due to restructuring in various industry sectors, will adversely impact aggregate household savings in 1999-2000.

This was revealed in a discussion paper of ICICI Securities and Finance Company, an economic research firm.

The paper said that the economic slowdown that began some time in the third quarter of 1996 and deepened in later years, is bound to have an adverse impact on savings, though with a lag, primarily due to rigid industrial employment laws.

This would also impact interest rates adversely as sovereign market borrowings increased sharply to fund the deteriorating fiscal deficit which has been budgeted at Rs 574.61 billion for the fiscal 1999-2000, Rs 100 billion lower than the net borrowing in 1998-1999, the paper said.

While the household sector would continue to prefer risk-averse investment avenues for their savings, there is no sign of an economic revival in the near future, as indicated in the slow non-food bank credit off-take.

The I-Sec paper estimated that the agriculture growth rate would be around 1.5-2.0 per cent as against the official expectation of 5.3 per cent and this would lead to an overall growth rate of 4.5 per cent in gross domestic product during the coming fiscal.

The industrial sector continued to witness a severe slowdown as the industrial production posted a growth of 3.7 per cent in April-December last year.

Indicating an expansion of fiscal deficit by around Rs 80 billion from the budgeted amount, the discussion paper said that the relative rigidity of the government's expenditure schedule had rendered the growth in non-plan component uncontrollable, particularly given the political situation.

Budgeting a growth level below eight per cent may be difficult to achieve, particularly when private investment is not readily forthcoming, it said.

Besides a lower deposit growth next year, the paper said that the reserve money growth at 16-17 per cent and broad money growth near 20 per cent would constrain the RBI's support to the borrowing programme next year.

The net borrowing programme has been supported to the extent of about Rs 100 billion by the non-banking system and Rs 180 billion by the RBI.

This implies that the net borrowing programme next year requires a support of about Rs 160 billion from the non-banking system and the RBI. If the currency does not come under pressure thereby necessitating tighter monetary policy, the liquidity equation appears to be balanced, it said.

The balance could be toppled if the fiscal deficit exceeds the budgeted figure or if credit picks up sharply. In such a scenario, the RBI would be forced to take further private placements. This may call for injection of further liquidity through cash reserve ratio cuts by the RBI, the paper added.

UNI

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