The spectre of the south-east Asian crisis has left its mark in the Reserve Bank of India's annual report for 1997-98, the first to be scripted by governor Bimal Jalan. The central bank has made it clear that maintaining external stability is of paramount importance. The policy objective, it says, will be to "maintain a higher level of foreign-exchange reserves in relation to current-account position keeping in view uncertain international developments".

The report, released on Friday, however, lauded the economy for its resilience and its strength in meeting macroeconomic challenges of domestic and international frontiers.

The reportsays that it should be possible to attain an overall gross domestic product growth of about 6.5 per cent in 1998-99 on the back of higher agricultural and industrial growth.

Known for his penchant for infrastructure development, Jalan has made it clear that the key to industrial revival is a rise in investments in roads, ports, power and telecommunications. Calling for a wider private-sector participation to meet the huge funds' requirement in infrastructure development, the Reserve Bank said innovative debt and equity instruments should be introduced to widen investor base. A transparent regulatory framework must be put in place, it says.

The Reserve Bank has warned the centre against any rise in the targeted amount of government borrowing programme in fiscal 1999, on the grounds that it will have an adverse impact on interest rates. Stating that the "growing reliance of the government of India to bridge the gaps between its receipts and expenditures has posed a challenge to monetary management," theReserve Bank has asked for the centre's firm commitment towards reducing the fiscal deficit.

"It is essential to avoid the recurrence of borrowing in excess of planned amounts in the current year, in view of the risk it bears on rates of interest. Markets would closely watch the evolving fiscal position, and, in particular, the progress of disinvestment programme and collection of revenue receipts. Any indication of slippage in this regard could trigger unfavourable market expectations," it says. Any rise in centre's borrowing programme will trigger interest-rate hike which, in turn, impacts investment decisions and capital flows, it has warned.

On the rising fiscal deficits of state governments, the central bank said the states should rationalise their tax structures and harmonise taxes -- moving away from sales taxes to value-added taxes (VAT) -- and also explore newer avenues for raising resources, like imposing tax on services.

Other suggestions include reduction of subsidies in non-merit goodssector and moving over from fixed coupon rate to auction system in borrowing. It has also warned states from indiscriminate issues of guarantees as they can exacerbate an apparently sound fiscal system.

Harping on the south-east Asian meltdown and its impact on the domestic economy, the report has called for a continuous monitoring of the external current-account deficit position. Given the capital and invisible receipts, current account deficit of about 2 per cent of GDP -- up from 1.7 per cent in 1997-98 -- is sustainable, it says.

The report also supported the existing restriction on capital account convertibility, saying "the continuing capital account restrictions in India have played a part in reducing possibilities of strong capital outflows".

This in effect amounts to virtual rejection of the Tarapore panel report on capital account convertibility. In stark contrast, the previous annual report (996-97) ent to the extent saying "an eclectic approach should be to liberalise the capital accounttransactions even as the process of achieving some of the preconditions are in progress".

Describing the international scene as "unfavourable" for developing countries, the central bank said "it is important to ensure that exports pick up and external current account deficit is sustainable." Exports, according to RBI, holds the key to effective long-term external adjustments."Export growth in 1998-99 hinges not only on macro policies but also on micro policies that ease internal and industry specific constraints," the RBI said.

It also clearly stated that process of financial sector reforms are reversible albeit temporarily as it is essential to respond to market developments home and abroad. "While this may at times give rise to discontinuities in the implementation of the pre-determined reform programme...macroeconomic considerations dictate that stance of policies is adjusted periodically to the changing ground realities," it said.

The objective of the monetary policy -- in an integrated marketsystem -- is to strike a balance between the quantum of liquidity required to support economic activities and the interest rates which determine investment decisions. It has hinted at working out a monetary conditions index and a model for liquidity forecasting on a periodic basis.