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Mumbai, Dec 12: The year-on-year expansion of money supply (M3) went up by 1.1 per cent to 19.5 per cent on November 27 from 18.4 per cent on November 6. Excluding the proceeds of the Resurgent India Bonds (Rs 17,945 crore), the year-on-year M3 growth was pegged at 17.2 per cent. The rise in money supply coincides with finance minister Yashwant Sinha's announcement on Saturday that the government's main challenge is to reduce the fiscal deficit to sustainable levels.
"If we have a challenge in government, it is the challenge of the fiscal deficit," Sinha told a seminar organised by the Federation of Indian Chambers of Commerce and Industry in Mumbai.
The rise in money supply, analysts feel, is likely to see the fiscal deficit overshooting at the end of the year. This is because the rise in money supply was triggered by the rise in bank credit to the government. The net RBI credit to the government has been on the rise. As on November 27, this amount had gone up by 12.1 per cent, compared with a rise of9.4 per cent in the previous week.
The net bank credit to the government has also gone up to 19 per cent on a YoY basis as against a rise of 18 per cent in the previous fortnight.Former RBI deputy governor SS Tarapore has called for a tight money policy without further delay.
"Money supply is increasing at a high year-on-year expansion of 20.5 per cent and gimmicks to exclude Resurgent India Bonds to show a lower M3 would, to say the least, be a disservice," Tarapore said. All this, if allowed to continue, could take the current account deficit in the balance of payments to over 3 per cent and put India in a critical situation," Tarapore added.
Echoing this, Sinha on Saturday said: "Much of the sentiment that governs the market will be guided by how we do and how we manage the whole situation," Sinha said. "I am determined that not only should I do my best, and make the government do its best to restrain fiscal deficit this year, but also set targets that will lead to the gradual reduction and finalelimination of fiscal deficit," Sinha added.
He said a consensus needed to be reached on this between the government, industry and the people.
Sinha has set a fiscal deficit target of 5.6 per cent of gross domestic product in 1998-99, after the previous government left the current coalition with a deficit of 6.1 per cent. However, analysts are already pegging the figure at 6.5 per cent due to a shortfall in revenues and continuous rise in expenditure on the part of the government.
Earlier this week, the minister said there could be a shortfall in indirect tax revenues. The net bank credit to the government, which is one of the main causes for the rise in the M3, would have gone up further but for the Reserve Bank's continuous open market operations (OMO) in 1998-99. Up to November 6, the RBI conducted OMO of central government securities to the tune of Rs 11,410 crore. After taking into account repo deals -- conducted to the tune of Rs 4,774 crore -- the net effect of the OMO was Rs 6,636 crore.
Ineffect, had there been no OMO, net bank credit to government would have gone up by Rs 6,636 crore and to that extent the year-on-year growth in M3 would have gone up as well.
"If the centre raises its gross borrowing target this fiscal, it will put tremendous pressure on money supply besides hardening the interest rates," senior analysts said.
The centre has already overshot its gross borrowing programme in 1998-99 with the latest three-year paper which was auctioned at 11.47 per cent. "If the government wants to raise its market borrowing target it must tap the non-bank entities," analysts said.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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