However, its projections for real GDP growth in 1999-2000 have been kept unchanged from that of last year at 6-6.5 per cent, broadly similar to its earlier projection of six to seven per cent made in monetary and credit policy announced in April this year.

In contrast to the previous few years' annual reports, where the central bank came down heavily on the Centre's fiscal mismanagement, the 1998-99 report has expressed satisfaction on fiscal developments. However, it also throws in a word of caution and urges the government to "ensure that the expectations of the1999-2000 budget are fulfilled and fiscal deficit is not allowed to increase beyond the budgeted figure".

This sets the tone for the entire RBI document: the central bank's war cry for fiscal correction has been subtly replaced by cautious optimism on the fiscal management with suggestions thrown in. The RBI has also avoided mention of its customary demand for central bank autonomy--an integral part of RBI annual reports over the last few years.

To meet the objectives of the budget, the RBI feels the government should focus on expenditure reforms and move towards the introduction of zero-based budgeting.

On the fiscal front, the central bank has advocated slashing aggregate expenditure to maintain or reduce the debt-GDP ratio. However, it has made it clear that the expenditure adjustment should not be done at the expense of capital expenditure which, as a proportion to total expenditure, has declined sharply from 26.1 per cent in 1991-92 to 22.6 per cent in 1998-99. The expenditure adjustment, accordingto the central bank, should go hand in hand with efforts to raise revenue collections.

As a measure of increasing the revenue flow, the central bank has asked the government to bring the growing services sector under the tax net. "The growth of the services sector has long-run fiscal implications to the extent that this constitutes a potential tax base for the government...A rising share of services in the GDP could result in lower growth of revenue to the government unless the indirect tax system is integrated under a single tax system such as the value added tax," the annual report said.

The RBI has also reiterated its stance that the present high level of fiscal deficit cannot be sustained in the long run despite a 6-6.5 per cent real GDP growth unless the government pushes up its revenue collections by bring in changes in tax structure. Besides, the continuing high fiscal deficit increases the government's reliance on market borrowings, putting pressure on interest rates and crowding out privateinitiatives.

It has also turned the spotlight on state government finances which are showing palpable signs of weaknesses with contingent liabilities like guarantees shooting up. The RBI has advocated a change in the states' fiscal agenda with large-scale investments in non-tradable infrastructure sectors like power, roads and communications.

On the monetary policy front, the central bank has reiterated its stance of maintaining liquidity conditions to support real sector activities. Ruling out any immediate cut in interest rates as a fallout of the low wholesale price index (WPI)-based inflation rate, the RBI annual report said the monetary policy could lean more towards bringing down medium and long-term interest rates for industrial recovery. The divergence of inflation rates in the short run, according to RBI, could be an outcome of supply side shocks which disturb the correlation between monetary growth and inflation.

The central bank's bullishness on the external front is also evident in theannual report. The optimism hinges on the twin factors of sustainable current account deficit (one per cent of GDP) and signs of growth in exports during the first quarter of the current fiscal. The RBI has advocated a cautious and gradual easing of capital account items. "It is vital that external liabilities and short-term debt are continued to be kept within limits," it said.