INDIAN ECONOMIC ENVIRONMENT JUNE 2003

CAIIB ASSOCIATE EXAMINATION JUNE 2003 INDIAN ECONOMIC ENVIRONMENT

SECTION
1. Define any five of the following terms: (a) Non Performing Assets.

An asset, including a leased assets, becomes non-performing when it ceases to generate income for the bank. A non-performing asset is defined as a credit facility in respect of which the interest and/or installments of Principal has remained past due for a specified period of time. With a view to moving towards international practices and to ensure greater transparency, it has been decided to adopt the 90 days over due norm for identification of non-performing assets from the year ending March 31, 2004. (b) Interest Rate Risk The risk faced by an investor due to variability in the interest rate during the life of an investment. Interest rate risk occurs when applying different bases of interest rates to assets and corresponding liabilities. (c ) Reverse Repo It is an action by the Reserve Bank of India where the securities purchased earlier are sold back. By this process money supply will increase. (d) Global Depository Receipts A Bank certificate issued in more than one country for shares in the foreign company. The share are held by a foreign branch. These shares are traded as domestic shares but are offered for sale globally through various bank branches. (e) Core inflation That part of inflation which is influenced by demand factors and not by transitory supply stocks such as sudden increase in certain items of food grains or other essential commodities like gas, kerosene, oil or sugar. It is the inflation rate of a particular basket of commodities as against a general inflation rate.

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(f)

RTGs This refers Real Time Gross settlement and this process adjustments are taking place instantaneously.

(g)

REER This refers to Real Effective Exchange Rate. The nominal exchange rate is the price of one currency in terms of another. Real Effective Exchange Rate tells us about the purchasing power of the currency and whether the exchange rate is competitive in international market.

2.

Fill in the Blanks (attempt any five) i) ii) iii) iv) v) vi) vii) Share of agriculture and allied activities in GDP in India in the last 3 years is around 24 percent Increase in savings lead to increase in investment Increase in non monetary liability leads to a decline in money supply (MS) Mutual funds in India are regulated by SEB Increase in foreign exchange reserves leads to an increase in money supply. Increase in subsidies leads to increase in aggregate expenditure of the Central Government. Increase invisible receipts leads to decline in current account deficit.

3.

State with reasons whether the following are true or false (attempt any five) i) The Liquidity Adjustment Facility operates through daily repo and reverse repo auctions. The statement is true. By understanding both repo and reverse repo auctions the LAF has emerged as the prime investment for managing liquidity. National Housing Bank can lend money to small scale industries towards their working capital. The statement is false. The credit limit to the National Co-operative Marketing Federation is authorised by the RBI false. It is authorized by NABARD. The Board for financial supervision is empowered to supervise primary dealers in India. Statement is true. Norms for classifying assets of banks into standard and sub-standard categories are prescribed by the Indian Banks Association false. It is done by RBI. FDI in Private Sector banks from all sources could be upto 75% under the automatic route. Statement is true. The market borrowing programmes of State Governments in India is finalized by the Planning Commission. Statement is true.

ii) iii) iv) v) vi) vii)

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4.

Select the correct answer from the alternatives and explain with reasons. (Attempt any five) i) Increase in GDP will lead to increase in employment (a) increase (b) decrease (c) No change. GDP is the measure of the total flow of final goods and services produced within the domestic territory of a country over a particular time period, normally a year. RBI credit to NABARD will increase money supply as this leads to credit to commercial sector which is one of the components of sources of money supply (a) increase (b) decrease (c) have no effection. Inflation in India is mainly caused by both monetary and fiscal factors (a) monetary (b) fiscal (c) both monetary and fiscal. Increase in external commercial borrowings will lead to increase in external debt (a) increase (b) decrease (c) No change. Increase in Non-Performing Assets leads to decrease in profits of commercial banks (a) increase (b) decrease (c) No change Tight monetary Policy leads to an increase in interest rates (a) increase (b) decrease (c) No change Increase in Special Drawings Rights issued by IMF leads to an increase in foreign exchange reserves SDR qualify as a foreign exchange asset (a) increase (b) decrease (c) No change.

ii) iii) iv) v) vi) vii)

5.

Answer any five of the following in 3-4 lines: i) ii) iii) iv) v) vi) vii) What is Capital Account convertibility? Explain debt trap. Explain forward Premium in the exchange rate. Explain growth-inflation trade off. Explain advantages and disadvantages of high food stock. Explain Equity Derivatives. Explain Operational risks in banks. i) Capital Account Convertibility (CCA) refers to unrestricted flow of interest income, investment money etc. across the boundaries. In India except residents, others to a large extent enjoy this. CCA implies special thrust on monetary and fiscal policies. Banks and other institutions should have the capacity to track the flow of capital. The question is do we have the capacity to do this.

ii)

Debt trap refers to a situation where investment income is insufficient to meet even the interest on debt and hence repayment remains a non-achievable one. In fiscal economics, continuous

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and high revenue deficit lead to a situation where debt receiving itself becomes a issue. Factors contributing to such situations should be given. Attention may be drawn to huge subsidy, interest payments and salaries etc. iii) Forward premium is the difference between the respective forward rate and spot rate. This indicates the supply and demand of foreign exchange for this duration. This also indicates expectation on interest differentials. Growth inflation trade off refers to situation where higher growth is accompanies by high inflation situation initially, terminating a lower growth but inflation remains at high level. Monetary and fiscal factors contributing to such scenario could be discussed. While high food stocks offer security against increasing food prices in times of draught etc. maintenance of stock becomes an issue and cost of maintaining such huge stocks outweigh benefits. Equity derivatives refers to derivative instruments where the underlying instrument is equity. This could be futures or options. This could be either European or American in nature. The exchanges which deal with them provide contracts at different strike prices and various options type. Introduction of equity derivation will help the investor to arrange the risk of equity investments better. Operation risk refers to various risks emanating from weakness of the organisational system itself. This includes legal risk also where contacts are not assessed properly from legal view point. Inadequate credit appraisal, weak link between management and staff etc. refer to operational risk.

iv)

v)

vi)

vii)

6.

Answer any five questions with clear reasoning and facts: i) Explain the Role of Debt Recovery Tribunal. The banks and the financial institutions were finding it difficult due to considerable delay in recovering their dues and enforcement of securities charged to them. Therefore it was felt necessary to establish special courts or tribunals to deal with such cases in order to recover the dues as quickly as possible. The Recovery of Debts due to Banks and Financial Institutions Act 1993 was passed to provide for the establishment of Tribunals for expeditious adjudication and recovery of debts due to banks. This Act has come into force with effect from 24th June 1993. The Tribunals have been established in various centres. The Central Government may establish one or more tribunals to be known as the Debts Recovery Tribunal to exercise the jurisdiction, powers and authority conferred on such tribunals by or under the Act. The Central Government shall also specify in the said notification the areas within which the tribunals so constituted may exercise jurisdiction for entertaining and deciding the application filled before it by the banks and other financial institutions like IDBI. The tribunal has the jurisdiction of entertaining execution petition involving decree of Rs. 10 lakhs and above.

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The Tribunal shall consist of one person only who shall be referred to on the Presiding Officer to be appointed by the Central Government. The person so appointed should be qualified enough to be a District Judge. Where a bank or a financial institution has to recover any debt from any borrower, it may make an application to the Tribunal. On receipt of the application the Debt Recovery Tribunal shall issue summons requiring the defendant to show cause within 30 days of the service of summons as to why the relief prayed for should not be granted. The Debt Recovery Tribunal may make an interim order against the defendant to debar his from transferring alienating or otherwise dealing with or disposing of any property and assets belonging him without the prior permission of the Debt Recovery Tribunal. The application for recovery of debt shall be dealt with by the Debt Recovery Tribunal as expeditiously as possible and endeavour shall be made by it to dispose of the application finally within 180 days from the date of receipt of the application. ii) What is meant by money laundering? What steps are taken by banks to protect themselves against this: Money laundering is a great threat to the country in general and the banking industry in particular. Money laundering is a process of hiding ill-gotten money earned from crime and corruption in black holes, with an intention to dodge investigators chasing the criminal. The money is later dug up in such a way that its source is lost. Money launders use normal banking channels very often to convert illegally received money and make it appear as though it originated from legitimate source. Banks have become the main targets in money laundering operations because of innumerable facilities and services provided by them and through which the criminals and others can conceal the sources of money. Of late, efforts have gathered momentum for a global action against money laundering with a view to prevent criminal activities such as terrorism/extortion/arms and drugs trafficking etc. which disrupt orderliness in the civilian societies. Bankers can do a great deal to help the Government in its anti-money laundering efforts. They must fill all appropriate statements and returns on time and follow all the laid down rules and regulations and procedures. For any bank, primary strength of stability lies in confidence of depositors, creditors and the market in general. Therefore, reputation risk in an important area which we can ill afford to ignore. Any association with money laundering activities can come in close scrutiny by the law enforcement authorities which if reported by the media can create lot of damage to the reputation of the banking institution associated with such an activity some of the procedures bank branches can do to help detect the culprits are: a) b) c) Establish an effective know your customer screening Be aware of parties to large value fund transfers Monitoring of cash transactions

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Obtaining of duly completed account opening forms proper introduction, obtention of latest passport size photographs, etc. should not be treated as just a formality but should be viewed as measures to safe guard the interest of the Bank and against opening of accounts by undesirable persons or in fictitious norms. iii) Which industries constitute infrastructure? Assess the performance of infrastructure industries in the last 3-years. Economic development of a country to a large extent depends upon agricultural and industrial sectors. Development of agriculture depends upon largely on the adequate expansion and availability of irrigation facilities. Likewise, industrial development depends on the availability of Power and uninterrupted electric supply, good transport and easy communication facilities. Hence it can be said that economic development of a country and more particularly the sectors like industry and agriculture depends on infrastructure facilities. The important constituents of infrastructure can be grouped as under: (1) Energy (2) Transport and (3) communication. Energy plays a vital role in the development and growth of an economy. In underdeveloped and developing countries the demand for energy keeps on increasing. In India nearly 40% of the energy consumed is obtained from non-commercial sources and the rest 60% is sourced from oil and gas, coal and hydro-electricity. Govt. of India evolved a new energy strategy. The main features are (a) accelerated exploitation of domestic conventional energy resources like oil, natural gas, coal and hydro-nuclear power (b) management of oil demand (c) energy conservation (d) substitution of natural gas for oil products. An efficient transport system is a key factor in economic development of a country. India is no exception. Good transport system provides a vital link between production centers, distribution areas and the ultimate consumers. Important means of transport are railways, roads, water transport and air transport. Communication net work is effectively managed and more and more telephone connections are installed even in rural areas. Irrespective of the political parties holding power, efforts are being made to improve the infrastructure facilities throughout the country. The Railway Minister has formulated an action plan to implement the strategy for the growth and modernization of railways in the Railway budget for 2003 2004. Due to privatization, more and more private airways have started their flights to various destination. There is a proposal for linking all the rivers in the country for which a commission head by a former Union Minister is chalking out a detailed plan for implementation. Linking of rivers will definitely help us in more than one way. iv) Define monetary aggregates and explain the monetary aggregates which are available in India. According to the definition given by J.L. Hanson in his Dictionary of Economics and Commerce, monetary aggregates M0 is equal to notes and coins in circulation with the public plus banks till

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money plus bankers balance with the central bank of the country. In advanced countries the correct definition of monetary aggregates is a matter of controversy among economists. The central bank in these countries compute three or four statistical series of money supply. In USA there are four measures and in UK there are six ranging from M0 to M5. The more widely used measures are M1, M2 and M3. The monetary aggregates can throw light on the effect of money supply changes on several economic variables like income, prices, wages, interest rates, balance of payment and also how to regulate money to achieve certain policy objectives. Some of the most important modern problems of economics are concerned with aggregates such as the general prices level rather than with individual items such as price of a potential product. To the branch of economic theory dealing with individual prices, wages and savings, the name micro economics is given. Lord Keynes saw that micro economics failed to explain the great problem of his own day, which could be considered only in terms of aggregates such as the volume of investment, savings, consumption, employment, the national income, services, what is time of individual is not always tune of the community as a whole. Monetary Policy includes measures taken by central bank and the government to manipulate the money supply with the intent to influence the output of goods and services, employment the price level, the rate of economic growth or the balance of payments. The broad objectives of monetary policy in India have been (a) to maintain a reasonable degree of price stability and (b) to ensure adequate expansion in credit to assist growth. The relative emphasis in between the two objectives depends upon the conditions prevailing in the year in question. Price stability as an objective is viewed not just as an end in itself but as a means to promote sustainable and more important equitable growth. This leads us to the inter-relationship among money, output and prices. Empirical evidence, as far as India is concerned, is clear that the demand for the real money function is reasonably stable. An increase in money supply not only results in an increase in demand but also influences output through the availability credit. We have been targeting broad money expansion as an intermediate target to achieve the ultimate objective. The concept of monetary targeting that we have been using is however a flexible one and takes into account the various feed backs. Monetary aggregates, as intermediate targets are appropriate in the Indian context for two reasons. First, the money demand functions for India has remained reasonably stable. Second, the money stock target is relatively well understood by the public at large with the money supply target, the stance of monetary policy is unambiguously defined and gives a clear signal to market participant. The RBI does not confine its attention to just one aggregate. A range of aggregates including aggregate credit is continuously monitored. v) Discuss advantages and disadvantages of mergers and acquisitions Globalisation of Indian economy has brought fierce competitive pressures on Indian banks from international banks. Size has therefore assumed critical importance with the virtual banking becoming part of Indian banking along with on going revolutions in information and communication technology, a perception that the branch net work of banks reflects its 8 strength is disputable. The Banks size is to be determined by the size of its balance sheet. Mergers, acquisitions and strategic alliances are beginning to appear on the banking scene to share synergies, reduce cost of operations and increase market share.

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There are however legal and social constraints in this direction. World over, the approach of mergers, acquisitions and consolidation is growing momentum. The recent mergers/acquisitions of some of the mega banks in America and Japan illustrates the shape of things to come in Indian banking system. The merger of erstwhile New Bank of India with PNB a few year ago created problems. That experience was not happy. Now Nedungadi Bank in Kerala is to be merged with PNB. While mergers and acquisitions are good for the weaker organisations, there are board to be problems with the employees of the weaker and stronger organisations and because of the fear of career progression and related issues there is going to be unhappiness among the employees. This aspect will have to be kept in mind when we propose mergers and acquisitions. vi) What are major instruments in the Indian money market? The money market is a market for short term financial assets that are close substitutes for money. Short term means a period of one year or less. Close substitute for money is any financial asset which is not money but which can be quickly converted into money with minimum transaction cost and without a loss of value. An effective money market requires the development of appropriate institutions, instruments and operating procedures that facilitate the widening and deepening of the market. Availability of multiple instruments is essential for improving the depth of the market. It helps the participants to deploy their surplus in suitable assets. In India major participants in the money market are commercial banks, LIC, GIC, IFCI, ICICI, RBI and Government of India. By varying the liquidity in the market through various monetary measures, RBI influences the availability and cost of funds. A well developed money market can contribute a lot in the efficient implementation of monetary policy. The important money market instruments are as given below: (a) Call money and notice money Core of the Indian money market structure is the inter banks call money market which is centralized in Mumbai with sub markets in Delhi, Kolkatta and Chennai. Call money is confined to inter bank business. This instrument meets the short term liquidity requirement of banks and other financial institutions. Interest rate on call money is market determined and sensitive to forces of supply and demand. Call money lending is for 1 2 days and such transaction can be for a maximum period of 14 days. Discount and finance house of India (DFHI) was set up to facilitate call money operations and reduce volatility in the call rate. (b) Repos Inter Bank This is a very useful fund/liquidity management instrument. The securities are sold by borrower to lender with the condition that the same will be repurchased by the borrower at a predetermined rate on a predetermined date. This instrument is very convenient to those banks which have

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surplus SLR but CRR deficit. Presently repo transactions are permitted against all GOI dated securities, treasury bills, PSU bonds, units of UTI, etc. (c) Repos RBI RBI also uses repos in its open market operations for evening out surplus liquidity in the market and reducing the volatility in the call rates. This also enables the surplus banks to plan their short term liquidity management. (d) Treasury Bills Treasury bills are short term Promissory notes issued by Government of India to raise short term funds to meet temporary mismatches in cash flows. This also helps the monetary authority to mop up excess liquidity from the systems. Features of T-bills are high liquidity, absence of risk of default, ready availability assured yield, low transaction cost, eligibility for inclusion in SLR and negligible capital depreciation. (e) Certificate Deposit The certificate of deposit (CD) is a money market instrument which can be issued by banks and financial institutions. This is an instrument of discretionary liability and is of the nature of issuance promissory note. The instrument is transferable by endorsement and delivery. CDs can be issued to individuals, corporations, companies, trusts, funds, associations and NRIs. (f) Commercial Paper Commercial Papers (CPs) are unsecured negotiable promissory notes issued by well rated corporates to raise short term funds for meeting working capital requirements directly from the market instead of borrowing from banks. CP is issued at discount to face value and is freely transferable by endorsement and delivery from the day of issue itself. (g) Inter bank Participation Certificates (IBPC) These are short term instruments to even out liquidity within the banking system. The objective is to provide some degree of flexibility in the credit portfolio of banks and smoothen consortium arrangements. This is purely an inter bank instrument. The RBI has authorised the banks to fund their short term needs from within the system through issuance of IBPC. There are also bill rediscounting and refinance drawal facilities to enable bank to tide over their liquidity shortages.

(vii) How financial services are likely to be influenced under WTO agreements? For the past few years we have been hearing about the globalisation of our economy. As a starting point a number of economic measures have been introduced so that the global integration process

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could be completed. As a fall out of the Uruguay Round of Trade Negotiations concluded in April 1994, the World Trade Organisation (WTO) was established in January 1995. India was one of the founder members of WTO. The objective was to increase overall world trade by $745 billion by the year 2005. The General Agreement on Tariffs and Trade (GATT) was not really an organisation but it was merely a legal arrangement whereas WTO is a new international organisation set up a permanent body and is designed to play the role of a watchdog in the sphere of trade as goods, trade in services, foreign investment, intellectual property rights, etc. The measures identified by WTO are: to produce for exports as a condition to obtain imported goods as inputs, to balance foreign exchange outgo on importing inputs with foreign exchange earnings through export, and not to export more than a specified proportions of the local production. For the first time, trade in services like banking insurance, travel, maritime transportation, mobility of labour, etc. has been brought in within the ambit of WTO. The WTO provides a multilateral frame work of principles and services which should govern trade in services under conditions of transparency and progressive liberalisation. The setting up of WTO is expected to bring substantial gains in world trade and increased income from liberalisation, improved market access and greater export opportunities. As regards services like banking, insurance and such other financial services as between developed and developing centers are concerned, the inclusion of trade in services is bound to benefit the developed countries much more than the developing countries like India. The service industry like banking in most of the developing countries and is an incipient stage and its progress will now be throttled under the new agreement. Foreign firms will now be free to expand their presence through their net work in Indias services sector. These companies will be allowed to remit their earnings to their parent companies in the form of profits, interest, royalties, etc. This is going to affect our foreign exchange position on a long term basis. Unless the services sector in India take steps to update their services by introducing information technology and introduce new products it may be difficult for them to compete with their foreign counter parts.

SECTION
Answer all five (a)

IV

What Policy measures do you suggest to improve the performance of small scale industries in India? The small scale industrial units are those which operate with a modest investment in fixed capital, relatively small scale work force and which produce relatively small volume of output. Over the last fifty years, the government of India have taken several policy decisions/measures to boost and strengthen the small scale industries. One such measure was to ensure that the SSI Sector gets regular bank finance. In this connection, the Nayak Committee constituted by RBI made various recommendations to improve the flow of credit to SSI Sector. To streamline the procedure for easy availability of financial assistance to small scale sector, Small Industries Development Fund was established in 1986 followed by the establishment of National Equity Fund in 1987 and introduction of single window concept in the year 1988. Because of

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these steps, there has been an all round development of small scale and cottage industries in India. Through small scale industries have recorded impressive growth in terms of number, output, employment and exports, the sector is still affected by several deficiencies and problems. A number of remedial measures have been suggested by a number of expert committees to ensure a healthy and all round development of small scale industries. There should be greater co-ordination among the various government agencies so that the needs of the small industries like finance, raw materials technical expertise, marketing, export promotion, etc. can be met effectively. There should be separate and sound institutional arrangements to monitor the activities of the small industrial units so as to ensure that they operate in a professional manner and to identify at an early stage the symptoms of sickness so as to enable the concerned agencies to take required measure quickly and initiate necessary action for rehabilitating the sick units. (b) Discuss the factors influencing the performance of capital market in India in the last years. Capital market comprises community of investors, intermediaries, issuers of securities, stock exchanges and regulatory authorities. Investors invest their surplus/ savings in securities offers by the deficit sector. Intermediaries facilitate investment and disinvestments. The entrepreneurs and government borrow the funds by issuing various types of securities. Stock exchanges are market places where securities are traded and settlement takes place. SEBI provides a regulatory frame work for capital market operations and lays down rules of the game. These are aimed at investor protection. All segments of capital market have made fast progress during the last decade. Market has been encouraged to create new instruments and institutions. Change of the investment behaviour has brought about perceptible improvement in turn over and depths of the market. The Indian capital market which was dormant upto mid-eighties witnessed an unprecedented boom during later half of eighties. Present population of investors is estimated to be more than 50 million. There has been a shift of household savings from physical assets to financial assets, particularly to risk bearing securities such as shares and debentures. The equity cost has spread throughout the country. During the last 10 years the growth of volumes in capital market has been tremendous. The rampant malpractices noticed in the capital market and stock scams, etc. stood in the way of infusing confidence in investors. Proper regulatory system was needed to help mobilization of resources through capital market. SEBI was established to protect the interest of investors by development and regulation of securities market through appropriate measures like regulating the business of stock exchanges, registration and regulation of intermediaries, promotion of investors education, prohibition of unfair trade practices, prohibition of insider trading, regulating business of securities market and creation of adjudicating machinery within SEBI and setting up of Securities Appellate Tribunal. (c ) Discuss the role of marine products exports in India and what steps do you suggest to improve the same. Most aspects of Indias global trade profile have changed since what they were earlier. The countrys total export base has grown 58 percent over the past five years from $33.21 billions for the financial year 1998 1999 to $ 52.37 billions for the year 2002 2003. Growth in rupee terms has been much higher at 82 percent primarily on account of 15 percent depreciation in the value of rupee against the dollar over the same period.

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The data on exports has been compiled and provided by the Directorate General of Commercial Intelligence and statistics with inputs from the customs department. The contribution of exports of agricultural and allied commodities to the countrys total exports has declined from 18.2 percent to 12.3 percent over the five year period 1999 2003. This decline implies an increase in the proportion of value added products in Indias export market India appears to be exploiting its extensive coastline to the maximum extent possible. Marine products continued to be the single largest category of exports within the sub-group of agricultural and allied products. Exports of marine products registered a healthy growth of 25 percent from $1.04 billion for the year 1998-99 to $1.38 billions for the year 2002 2003. One of the important area to be looked into is the storage and preservation of marine products. There are no proper facility for boats to bring in the fish products from high seas and therefore suitable small juttis will have to be erected to enable the fishermen to bring the fish to the land area. Proper cold storage facilities also will have to be organized. The quality of the marine products will have to be improved and proper hygiene conditions will have to be created in packing and storing. If quality of the products are maintained the marine products exports can be further improved. d) In what way guarantees and contingent liabilities influence the fiscal deficit of Indian State Governments? What steps are required to safeguard their negative impact? States are of varying sizes and are at different levels of economic and social development. Some State have progressed well in terms of social development and a few have done well in rapid economic development. The stress on the finances of the State Governments became evident when their revenue account started showing deficits in the late 1980s. The steady deterioration in the revenue account caused enlargement of States gross fiscal deficit. The curtailment in gross fiscal deficit could be achieved through declaration in capital expenditure which would have adverse implications for growth. Contingent liability is a liability which may arise only in certain circumstances. For example, a person may have acted as a guarantor in order to enable another to obtain a loan. If the loan is not repaid by this borrower the guarantor will have to accept the liability. The State Government in India have the habit of standing as a guarantor in several ventures. For example, the State Government in Maharashtra stood guarantee for getting financial assistance to the sugar factories in the State and many of these factories could not repay the loan. The financial institutions went to the country loan against the guarantor and the court ordered the confiscation and sale of State Government properties compelling the state to organize the fund required to repay the loan. All guarantees are contingent liabilities and they are not generally treated as a liability. However, if the guarantee is involved, the State government will have to bear the financial burden created by the projects and organisations for whose benefit the States have given guarantees.

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Recognizing the importance of guarantees and their implications on the finances, it was decided to include the following in terms of a working a working group on State guarantees. (a) (b) (c) (d) (e) (f) Hidden liabilities, including the letters of comfort, which have the consequence of a guarantee. The level of the guarantee for The possibility of prescribing a legal ceiling on all guarantee and criteria for fixing a ceiling. The importance of attaching weights to risks and arriving at risk weighted guarantees. Discouraging the Public Sector entities from insisting on guarantees. Prohibition on seeking or giving of guarantees for working capital needs of enterprises.

Considering the prospects of the burden on the future generation on account of the rising public debt, contingent and other liabilities and with a view to increasing the awareness of this issue, it was decided that accounting mechanism should be adopted to depict inter-generational equity considerations in managing public finance. The Reserve Bank of India has agreed to develop a model of accounting practice for this purpose by obtaining necessary information on the best practices in the World. Many states felt that a fund to be administered by RBI so as to enable the State Governments to meet the eventuality of invocation of guarantees and contingent liabilities. e) Discuss the performance of inflation in India and factors contributing to the same in the last 3 years. In general, among the developing countries, Indias inflation performance would be considered as satisfactory. During the 1950s, the average decadal rate of inflation was very low at 1.7 percent, with the rate varying in a wide range from a negative value of 12.5 percent to a positive value of 13.8 percent. The minimum inflation at a negative rate in 1952 53 was in response to the bumper agricultural production that year, while the maximum inflation rate in 1956 57 was mainly attributed to demand pressures. During 1960s, the average decadal inflation edged upto 6.4 percent. The inflationary pressure started mounting from 1963 1963 on account of the Chinese war in 1962. The Pakistan War in 1965 and the famine conditions during 1965 66 aggravated the situation further. The maximum inflation at 13.9 percent was recorded for the year 1966 67 but the minimum inflation rate of 1.1 percent was in 1968 69 attributed primarily to the bumper agricultural production the preceding year. The average inflation rate during the 1970s was still higher at 9.0 percent. The maximum inflation recorded in the year 1974 75 at 25.2 percent was mainly attributed to the failure of Kharif Crops in 1972 73 as also the hike of crude oil prices in 1973. The minimum inflation rate 1.1 percent was recorded in the following year, i.e.1975 76 in response to the substantive anti inflationary measures taken by the Government. The 1979 80 witnessed a strong resurgence of inflationary pressures mainly due to poor agricultural output and the second hike in international oil prices. This decade was the most tribulations as far as the price situation was concerned. During the 1980s, the decadal average inflation moved down somewhat to 8 percent. The highest inflation rate was 18.2 percent in 1980 81 and the minimum inflation rate was 4.4 percent for 1985 86.

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The period 1990 91 to 1997 98 witnessed a resurgence of inflationary tendencies with four of the seven years showing a price rise between 10 and 15 percent. Following the Gulf crisis of 1991, the first half of the decade was characterized by double digit inflation the sole exception being 1993 1994 with an inflation rate of 8.4 percent. From 1995 1996 to 1997 1998, there was a reversal of the trend, as reform measures began to show a positive impact on prices and the average inflation rate for the 1990s upto 1997 1998 was 9 percent. India thus recorded relatively satisfactory levels of inflation for the entire period 1950 51 to 1997 98, with the average rate of inflation hovering around 6.7%. The high pressures of inflation were felt on almost all occasions due to exogenous shocks like oil price hike, the gulf crisis and wars and domestic supply shocks such as adverse monsoon conditions. The point to point inflation rate declined to 4.8 percent in 1998 99 from 5.3% in 1997 98. As regards 1999 2000 on a point to point basis the inflation was lower than that of 4.78 percent recorded during the previous year. Last 3-years, the inflation rate was considerably low. To conclude, we can say that Indias track record on inflation has been satisfactory and there are good chances that we would improve on it further in the days to come. n

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