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April 19, 2001
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Slowdown in services sector has hit economy: RBI

Click here for bigger picture: RBI Governor Bimal Jalan. Photo: Jewella Miranda The deceleration in services sector has held down the growth in gross domestic product of the Indian economy during the fiscal year 2000-01 says the Reserve Bank of India.

In its report on macroeconomic and monetary developments in fiscal 2000-01, the RBI said that the services sector growth slackened from 9.4 per cent in 1999-2000 to 8.4 per cent in 2000-01 as the slowdown was evident in major categories such as financing, insurance, real estate and business services and, community, social and personal services.

Quoting the advance estimates of the Central Statistical Organisation, it said that the real GDP growth declined to 6 per cent in 2000-01 from 6.4 per cent in the previous year. The growth rate originating from agriculture and allied activities roses marginally to 0.9 per cent from 0.7 per cent while the growth from industry remained unchanged at 6.1 per cent as in the preceding year. Manufacturing decelerated to6.4 per cent from 6.8 per cent over the previous year.


The GDP growth in agriculture and allied activities showed down to 1.7 per cent in the first quarter of 2000-01 but increased to 1.9 per cent in the second quarter and posted a growth of 1.2 per cent in the third quarter over the absolute decline of 1.1 per cent recorded in the same period in the previous year. In this context, the central bank observed that the prospects of the rabi crop compensating for the kharif shortfall were not very encouraging in view of the drought-line conditions in major parts of the country.

Accordingly, the total production of foodgrains is expected to be about 196.1 million tonnes in 2000-01, nearly 12.8 million tonnes below the peak of 208.9 million tonnes recorded in 1999-2000.

Industrial Production

In terms of the index of industrial production, industrial output recorded a growth rate of 5.1 per cent in the eleven-month period ended February 2001, lower than 6.5 per cent in the corresponding period of the previous year. Monthly growth rates of IIP showed a steady deceleration upto August followed by a pick up in September-November period. However, from December onwards, the growth rate decelerated mainly due to the slowdown in manufacturing and electricity generation and also in infrastructure sector.

Centre's borrowings

The report, which was issued along with the statement on monetary and credit policy for 2001-02, expressed concern over the high order of borrowings by the Centre and states and the consequential overhang of public debt poses challenges for debt management. It leaves little flexibility for the debt management authority to minimise borrowing costs in the face of continuous increase in bond supply.

While the moderation and stability in the long term interest rates would depend upon the efforts to achieve sustainable levels of fiscal deficits and debt, the RBI said that the deficit targets to bring down the Centre's gross fiscal deficit and revenue deficit to 5.1 per cent and 3.6 per cent receptively, were achieved during the year due to buoyancy in revenue receipts and reigning in of expenditure.

The revenue receipts registered an increase of Rs 24.93 billion (1.2 per cent) mainly on account of non-tax revenue while the tax revenue suffered a decline of Rs 18.06 billion due to shortfall in indirect tax collections such as customs and excise duties.

While the invisible receipts would keep the current account deficit at nearly one per cent of GDP in 2000-01, the RBI said that the merchandise trade deficit on the balance of payment was at $13.2 billion during the three quarters of the year compared to $11.4 billion in the same period previous year.

Overall trade deficit during April-February period, narrowed to $5.8 billion from $8.7 billion in the same period of the previous year. India's import increased significantly in the eleven-month period of the year due to oil price hike, which surged.

Debt management

In its report on macroeconomic and monetary developments for the fiscal year 2000-01, the RBI observed that the principal issue governing the conduct of debt management policy is to evolve an optimum of maturity structure and interest rate. Further moderation and stability in the long-term interest rates in the future would depend upon the efforts to achieve sustainable levels of fiscal deficits and debt, it said.

The Fiscal Responsibility and Budget Management Bill 2000, which aims at correcting the deficit and debt in the medium-term to sustainable levels, is expected to impart credibility to fiscal management and facilitate debt management.

The objectives of the bill include elimination of the revenue deficit by March 31, 2006, bringing down the fiscal deficit to two per cent of the GDP in the same period, and prohibition of direct borrowings by the Union government from the RBI after three years except by way of advances to meet temporary cash needs.

Despite the downward rigidity in the level of government borrowings, the RBI report said that debt management operations played an effective role in moderating the interest rate on government borrowings and facilitated a downward movement in long term interest rates in the recent years.

The net market borrowings initially allocated for all states during 2000-01 have crossed the limit in excess of about Rs 16.50 billion. Initially, the allocation of borrowings was Rs 112.30 billion but it went up higher to Rs 128.80 billion at the end-March, 2001. As on March 31, state governments' outstanding ways and means advances -- or WMA -- and over drafts from the RBI amounted to Rs 68.11 billion as against Rs 75.19 billion at the end of march, 2000.

However, the centre raised net borrowings of Rs 737.87 billion, lower than the budgeted borrowing programme of Rs 763.83 billion for the full fiscal year.

Revenue earnings

On revenue earnings, the RBI said that the net tax revenue suffered a decline of Rs 18.06 billion primarily due to the shortfall in indirect taxes particularly excise and custom duties.

While aggregate expenditure was kept below the Budget estimates by Rs 29.64 billion, the reduction in non-plan expenditure by Rs 11.03 billion was on account of the reduction under pensions (Rs 13.11 billion), interest payments (Rs 5.99 billion), grants to states and union territories (Rs 15.32 billion) and defence (Rs 41.26 billion). The plan expenditure was less than the budgeted level by 2.1 per cent (Rs 18.62 billion).


Monetary & Credit Policy 2001-2002 (First Half)


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