The Reserve Bank of India’s (RBI) income from its holding of domestic assets, such as government securities, has fallen to a further historical low. As of 2005-06, its income from such sources is only around 6.7 per cent of total gross income compared with 10.7 per cent a year before. Over 2005-06, even as returns on its holdings of foreign securities (such as US government bonds) jumped by 44 per cent, returns on the domestic portfolio fell by 13 per cent. The return on the RBI’s foreign portfolio rose from 3.1 per cent in 2004-05 to 3.9 per cent in 2005-06 (the RBI’s financial year runs from July to June). And interestingly, the yield on domestic assets was just 1.8 per cent, down from 2 per cent the year earlier.
In its latest annual report, the RBI wags its finger sternly at those (like the Planning Commission) who effectively called on the finance minister to go easy on fiscal discipline. In its approach paper to the 11th Plan (due to run from 2007-12), the Planning Commission, which wants the government to spend heavily on the social sector, pointed out that this was not possible if the government stuck to its fiscal discipline targets in the FRBM Act.
The problem is that much of social sector spending is classified as revenue expenditure; thus the revenue deficit targets (of zero per cent in FY 2009) were unlikely to be met if the government went along with the Planning Commission’s suggestion to increase spending in these areas. For instance, the Plan body points out that the attempt to expand health facilities and also the National Rural Employment Guarantee Scheme could lead to additional expenditure of over 1 per cent of GDP by FY 2008. And it would rise to more than double that by 2012.
Then there’s the Pay Commission recommendations and the hefty tax exemptions offered under the SEZ Act to contend with. The Planning Commission’s solution was simply to shift fiscal discipline targets further into the future. The RBI is having none of it: “Adhering to the FRBM targets is critical,” it said. “Any deviation from the FRBM targets will have both national and international repercussions in terms of credibility.”
It is a fair bet that the finance ministry will choose a solution that will please no one: provide smaller amounts of funds for social sector spending than what the Planning Commission asks, but still go ahead and push the fiscal discipline targets back anyway.
The intense competition among banks to offer ever higher interest rates to depositors is bearing fruit. Deposit growth is inching up and now stands at 21.3 per cent in year-on-year terms compared with the 15 per cent projected by the RBI for the entire fiscal, according to the Centre for Monitoring Indian Economy (CMIE). However, this is still well behind the growth in non-food credit, which increased 33 per cent over last year. If credit growth continues to remain strong, and given that banks are already offering as much as 8.5 per cent on longer term deposits, the prospect of double-digit interest rates on deposits now seem to be a real possibility. This is especially true, if, as CMIE points out, growth in current and savings account deposits slow down further. In year-on-year terms, growth in so-called demand deposits has already slowed from 43 per cent at the end of March to 23 per cent in the third week of July.
The problem is that much of social sector spending is classified as revenue expenditure; thus the revenue deficit targets (of zero per cent in FY 2009) were unlikely to be met if the government went along with the Planning Commission’s suggestion to increase spending in these areas. For instance, the Plan body points out that the attempt to expand health facilities and also the National Rural Employment Guarantee Scheme could lead to additional expenditure of over 1 per cent of GDP by FY 2008. And it would rise to more than double that by 2012.
Then there’s the Pay Commission recommendations and the hefty tax exemptions offered under the SEZ Act to contend with. The Planning Commission’s solution was simply to shift fiscal discipline targets further into the future. The RBI is having none of it: “Adhering to the FRBM targets is critical,” it said. “Any deviation from the FRBM targets will have both national and international repercussions in terms of credibility.”
It is a fair bet that the finance ministry will choose a solution that will please no one: provide smaller amounts of funds for social sector spending than what the Planning Commission asks, but still go ahead and push the fiscal discipline targets back anyway.