Foreign investments in the current financial year would be substantially higher than the inflow of $6 billion recorded in 1996-97 and the current account deficit would be around 1.5 per cent of the gross domestic product (GDP), says Reserve Bank of India Governor C Rangarajan.
Addressing the annual meeting of the board of central bank chiefs here yesterday, Rangarajan said the economic fundamentals were strong and the debt service ratio was projected to decline substantially from 25.4 per cent in 1996-97 to about 21 per cent in 1997-98.
We are exploring possibilities of liberalisation of capital account. An expert committee recently submitted a report providing a road map on capital account convertibility. This is under examination by the central bank and the government, he told the meeting.
He sought to dispel the impression that liberalisation had come to a standstill and said the government was committed to its resolve to rein in fiscal deficit.
Let me not give the impression that we do not face any policy challenges. Very recently, we have had to deal with the problem of coping with a large wage settlement for government employees. In order to contain the fiscal deficit at the budgeted level, the government has acted promptly to raise fresh taxes, cut expenditure and expand the programme of disinvestment of government owned enterprises, the governor said.
Rangarajan pointed out that the government had successfully tackled large capital inflows in the context of monetary and exchange rate management.
Our experience shows that monetary and financial policies geared to maintain a reasonable degree of price flexibility can serve the purpose of maintaining a stable domestic environment and avoiding the need for disruptive exchange rate adjustment, he said.
According to the governor, one of the challenges facing the economy was poverty. He maintained that with a conducive external environment, the economy will be able to realise a sustained growth of over 7 per cent per year which would contribute towards reducing poverty and providing resources for social development.
The RBI governor also reiterated the countrys commitment to good governance and drew global attention to the recent statements by the Prime Minister that efforts were underway to weed out corruption.
Rangarajan told the audience that there was a concerted need to revive growth prospects in developing countries. In this context it is essential to encourage rapid recovery through strengthening of a open, non-discriminatory multilateral trading system operating within the WTO framework, he said.
Referring to the South-East Asia crisis, he opined that it showed that there was no substitute for prudent macroeconomic policies, effective reforms and a strong domestic financial system to facilitate growth with stability and orderly external payment conditions. It is essentially through such a strategy that countries can avoid currency crises and also lay the foundation for a rapid and sustained development that is necessary for raising general standards of living and alleviating poverty, he said.
Our experience shows that monetary and financial policies geared to maintain a reasonable degree of price flexibility can serve the purpose of maintaining a stable domestic environment.
