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RBI highlights govt.'s imbalances

Apr 21, 2009

The RBI's annual review of its monetary policy, which is expected to be more of a ritual today rather than a newsmaker, will have little to elaborate on the central bank's policy moves. The reasons being the RBI's limitation so far in impacting economic and credit growth through its monetary tools and its compulsion to release liquidity by buying back bonds to support the government's borrowing plans. The RBI in its statement of 'Macroeconomic and Monetary Developments' released yesterday did not shy away from projecting a cautious outlook for the Indian economy, which it said 'continues to exhibit the persistence of less than normal sentiments'.The RBI's concerns are further articulated in the annual accounts of the central government which clearly show an imbalance between the components of receipt and expenditure. While the revenue receipts have almost remained stagnant in the past fiscal, the Centre relied heavily on capital receipts, particularly market borrowings.

On the expenditure front, the upcoming polls seem to have had an overbearing on the Centre's expenditures with the expensive borrowed funds having been generously given away in the form of subsidies to appease voters. In fact as a percentage of GDP, subsidies comprised 2.5% of the country's GDP in FY09 (1.5% in FY08), the highest in the past decade.

Receipts of the Centre

(Rs bn) FY08 FY09 Change
Revenue receipts 5,419 5,621 3.7%
Tax revenue 4,395 4,659 6.0%
Non tax revenue 1,024 962 -6.1%
Capital receipts 1,708 3,388 98.4%
Borrowings 1,306 2,665 104.1%
Recoveries of loans 51 97 90.2%
Disinvestment proceeds 45 26 -42.2%
Other 306 600 96.1%
Total receipts 7,127 9,009 26.4%

Expenditure of the Centre

(Rs bn) FY08 FY09 Change
Non plan expenditure 5,076 6,180 21.7%
Interest payments 1,710 1,927 12.7%
Defence expenditure 917 1,146 25.0%
Subsidies 709 1,292 82.2%
Other 1,740 1,815 4.3%
Plan expenditure 2,051 2,829 37.9%
Total expenditure 7,127 9,009 26.4%

While it is pertinent for the government to increase its tax revenue receipts in FY10 (dropped from 12.6% of GDP in FY08 to 11.1% of GDP in FY09), other means such as divestment of stakes in PSUs can help reduce the borrowings and correct the imbalance. However, all such fiscal measures can take shape only after the conclusion of the general elections. Meanwhile, the Centre has passed on the mantle of maintaining monetary balance to the RBI. Over to the central bank.

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