RBI - Monthly Bulletin - May 2011

Posted on    12 May 2011


RBI - Monthly Bulletin - May 2011


The May issue of the Bulletin issue carries six special articles: (i) Developments in India's BoP during Third Quarter of 2010-11: Trade, Invisibles and Capital Account, (ii) Union Budget 2011-12:  An Assessment (iii) Railway Budget 2011-12: An Assessment (iv) Finances of State Governments - 2010-11: Highlights (v) Survey of India's Foreign Liabilities & Assets for the Mutual Fund Companies (2006-2009) (vi) Survey of Small Borrowal Accounts, 2008. Highlights of the special articles are:



1. Developments in India's BoP during Third Quarter of 2010-11 : Trade, Invisibles and Capital Account

This article provides details on developments in India's balance of payments during October-December 2010 along with the partially revised data for April-June 2010 and July-September 2010. The disaggregated data on invisibles for the first three quarters of 2010-11 as well as for the financial years 2007-08, 2008-09 and 2009-10 have also been published as part of this article.


Main Findings

·         The trade deficit in absolute terms at USD 31.6 billion during October-December 2010 was almost of the same level as that of the corresponding quarter of the preceding year (USD 30.9 billion).

·         Net invisibles (invisibles receipts minus invisibles payments) increased by 17.0 per cent during October-December 2010 (as against a decline of 19.0 per cent a year ago) to USD 21.9 billion.

·         Strong recovery in net invisibles surplus led to the moderation in the current account deficit to USD 9.7 billion (from USD 12.2 billion a year ago) despite higher trade deficit.

·         The capital account surplus increased only marginally to USD 14.9 billion during the quarter (USD 14.6 billion a year ago) as the higher net inflows under FII investments, external assistance, ECBs and banking capital were offset by the moderation in inflows under foreign direct investment (FDI) and short-term trade credits.

·         With capital account surplus being higher than the current account deficit, the overall balance was in surplus at USD 4.0 billion resulting in a net accretion to foreign exchange reserves of equivalent amount during October-December 2010.


2. Union Budget 2011-12:  An Assessment         

The article is an assessment of the Union Budget 2011-12 presented to the Parliament on February 28, 2011. The underlying macroeconomic framework of the Budget is examined along with the Central Government’s strategy to carry forward the process of fiscal consolidation. It also identifies some key policy initiatives announced in the Budget in respect of tax reforms, agriculture, infrastructure, exports and the financial sector.


Main Findings

·         The Union Budget 2011-12 indicates a favourable macroeconomic outlook in terms of real GDP growth (9 per cent), inflation scenario (5 per cent) and expected moderation in current account deficit.

·         The fiscal outcome in terms of revised estimates (RE) for 2010-11 turned out to be better than budgeted. The Central Government’s gross fiscal deficit (GFD) and revenue deficit (RD), as ratios to GDP, were lower at 5.1 per cent and 3.4 per cent, respectively, in   2010-11 (RE) over the budgeted estimates of 5.5 per cent and 4.0 per cent for the same year, reflecting the impact of more than anticipated one-off non-tax receipts and the upward revision in GDP.

·         The budgetary estimates for 2011-12 indicate commitment to carry forward fiscal consolidation. The RD, as a ratio to GDP, is budgeted to remain unchanged at 3.4 per cent of GDP in 2011-12. However, the GFD-GDP ratio is budgeted to decline to 4.6 per cent in 2011-12 from the level of 5.1 per cent in the previous year.

·         The tax-GDP ratio is budgeted to increase in 2011-12 over the previous year.

·         Sharp moderation in revenue expenditure growth and marginal decline in budgeted capital expenditure is expected to contain expenditure growth this year.

·         The expenditure on subsidies is budgeted to decline in 2011-12, which may be subject to upward risks, particularly in view of rising international fertiliser and petroleum prices as well as the likely introduction of National Food Security Bill.

·         Moving forward, the Government envisages corrections in RD and GFD under its rolling targets for 2012-13 and 2013-14. The targeted key deficit-GDP ratios to be achieved by 2013-14 would, however, remain higher than those recommended by the Thirteenth Finance Commission.

·         The Central Government intends to introduce an amendment to the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 during the course of 2011-12, which would lay down the fiscal roadmap for the next five years.


3. Railway Budget 2011-12: An Assessment

The article covers the salient features of the Railway Budget 2011-12 which was presented in the Parliament on February 25, 2011.


Main Findings

·         The surplus of Railways is budgeted to increase by 28.1 per cent during 2011-12, reflecting higher earnings from both passenger travel and freight traffic. The growth in passenger earnings is budgeted to be even higher than the average for 2007-2010 despite no revision in the fares, thereby, anticipating increased earnings from new train services.

·         The Railway Budget 2011-12 proposed various business-oriented policy measures to expand railway network, keeping in view the need to enhance capacity while also promoting setting up of rail-based industries and creating employment opportunities. The overall approach of this Budget 2011-12 has been to balance economic imperatives with social inclusion objective.

·         The Railway Budget 2011-12 continued to accord greater priority to safety and security by putting in place a reward system for the States. The emphasis on enhanced connectivity of underdeveloped regions is desirable to support the objective of inclusive development of Indian economy.

·         Among other initiatives, the Budget proposed to introduce a system of e-procurement and e-auction to ensure transparency and economy and has declared 2011-12 as the Year of Green Energy.

·         Persisting high operating ratio and lower return raise a cause of concern for long-term commercial viability of Indian Railways. In this context, the Budget’s emphasis on growth along with efficient functioning of Indian Railways is a step in the right direction.

·         Taking note of resource constraints, a number of projects are proposed to be undertaken under PPP mode like wagon manufacturing units, etc. The financial performance indicators such as operating ratio, net surplus and return on capital have been estimated to improve during 2011-12 but would remain lower than the levels attained in 1997-98.


4. Finances of State Governments - 2010-11: Highlights

The article presents highlights of finances of State governments based on “State Finances: A Study of Budgets of 2010-11” released on March 30, 2011.


Major Highlights

·         The developments in State finances during 2008-09 to 2009-10 reflected the impact of a moderate slowdown in the Indian economy. Despite some deterioration in State finances during 2008-09, the consolidated revenue account of States showed surplus position, albeit lower than that in 2007-08. However, the impact of the macroeconomic slowdown was sharper in 2009-10 (RE), when revenue deficit (RD) re-emerged at the consolidated level after a gap of three years and the gross fiscal deficit (GFD) shot up above 3 per cent of GDP. With an improvement in growth prospects coupled with fiscal consolidation initiatives; both consolidated RD (0.3 per cent of GDP) and GFD (2.5 per cent) were estimated to fall in 2010-11 (BE).

·         Improvement in State finances in 2010-11 (BE) was expected to be broad-based as most States were likely to improve their revenue accounts in 2010-11. While presenting their budgets, States seemed to have shown their inclination to revert to the path of fiscal consolidation prescribed by the Thirteenth Finance Commission.

·         Correction in revenue account in 2010-11 was expected to come mainly through compression in revenue expenditure as a ratio to GDP from 13.0 per cent in 2009-10 (RE) to 11.9 per cent in 2010-11 (BE).

·         Even with slippages in 2008-09 and 2009-10 on fiscal deficit targets and consequent higher market borrowings, the overall debt position of States at 25.0 per cent of GDP in 2009-10 remained within the recommended target of the Twelfth Finance Commission. The debt-GDP ratio was expected to further decline in 2010-11 (BE).

·         Contemporary issues such as the fiscal roadmap for States, implications of recommendations of the Thirteenth Finance Commission, the proposed introduction of Goods and Services Tax, quality of expenditure, the cash balance position of States, disclosure and dissemination in State budgets and strengthening of State Finance Commissions have also been addressed.

·         An assessment on the role of Finance Commissions (FCs) points out that the scope of FCs has extended beyond the constitutional tasks of deciding the proportion of tax revenue to be shared with the States and determining the principles governing the grants-in-aid.

·         The FCs has also been assigned the task of analysing and providing recommendations on several other issues impinging on State government finances. Of late, the issues relating to augmentation of State Consolidation Funds to supplement the resources of local bodies and the States’ debt position have also been examined by the FCs. Based on a comparative analysis of recommended and benchmark (using the equalisation principle) transfers, it is observed that the equalisation component was the highest in the case of the Eleventh FC as the gap between recommended and benchmark transfers was minimum.


5. Survey of India's Foreign Liabilities & Assets for the Mutual Fund Companies (2006-2009)

The article presents an overview of the foreign assets and liabilities of mutual fund companies (MFs) in India based on the results of the Reserve Bank’s Foreign Liabilities & Assets Survey (FLAS). The reference period is March 2006 to March 2009 The results cover the responses of 40 MFs for March 2009 which opened/acquired foreign assets or liabilities and 31 of these companies were common during the entire survey period. The study analyses in detail the noticeable increase in foreign assets and foreign liabilities of MFs during this period and country-wise classification of the foreign assets and liabilities has also been made.


Main Findings:

·         Foreign liabilities were estimated to be over seven times the foreign assets of MFs in March 2009 even as both recorded substantial growth.

·         The rapid growth in balance sheets of MFs was arrested during the global financial crisis year of 2008-09 when most parameters moderated or declined.

·         The consistently increasing trend in their reinvested earnings was also arrested during the crisis year.

·         As there was no investment by MFs in overseas debt securities, their overseas portfolio assets were solely in terms of equity investment.


6. Survey of Small Borrowal Accounts: 2008

The article presents the findings of  Survey of Small Borrowal Accounts for the year ended March 31, 2008 the seventh in the series and was conducted to obtain a profile of small borrowal accounts (accounts  each with credit limit of `2 lakhs or less) for which account-wise details are not collected through the Basic Statistical Returns (BSR) system.


Main Findings

·         These accounts constitute about 88 per cent of all borrowal accounts, even though in terms of outstanding credit, their share is less than 14 per cent.

·         The survey covered 52.6 per cent of over 9.4 crore small borrowal accounts which accounted and 47.5 per cent of the outstanding credit `3,29,396 crores to small borrowers.

·         Agriculture and Personal Loans dominated the small borrowal account. About 40 per cent of the Agricultural loans were disbursed through Kisan Credit Cards and about 60 per cent of agricultural loans were charged interest at the rate of 6 to 10 per cent annually.

·         While presenting the broad structure of these accounts, separate profile of accounts of the women borrowers are also presented.


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