So far as economic management is concerned, the RBI gives itself a well-deserved pat. There is no doubt the central bank has conducted its monetary policy with remarkable pragmatism. Sharply criticised at the beginning of his tenure by his supposedly cavalier attitude towards forex markets, governor Jalan has silenced his critics by proving himself right, and insulating forex markets from the impact of the southeast Asian crisis. Nor has he adopted a doctrinaire approach to the larger than targeted growth in money supply, recognising the need to ward off deflationary tendencies and lower interest rates.

Asthe RBI's annual report puts it, the RBI recognised that the inflation spike last year was due to an adverse supply shock that was temporary and self-reversing in nature, and monetary policy could therefore lean towards bringing down medium- and long-term interest rates for creating the necessary conditions for industrial recovery. While averring that the rate of inflation this year is likely to remain well below the long-term trend, the report points towards certain long-term factors which may have had a permanently lowering effect on the rate. Positive productivity shocks post liberalisation, together with raised competition would reduce markups in domestic manufacturing, contributing to low inflation. Depressed commodity prices transmitted through a more open economy have also helped. The report is also moderately upbeat on the rise in exports in the last few months, and it calls for cautious and gradual easing of controls on the capital account. While welcoming the increase in demand due to the ruralrecovery last year, the RBI wisely points out that agricultural production in the nineties has so far been low at only 2.6 per cent compared to 5.2 per cent in the eighties. Further, success has been confined to a few crops, and the report stresses that public investment in agriculture will have to be increased. The report also raises several issues on fiscal policy. The gross fiscal deficit to gross domestic product of state governments last year was the highest recorded in fiscal history, and the high fiscal deficit is clearly unsustainable. It warns that a large mobilisation of revenue receipts is not possible without bringing about sharp changes in the tax structure and efficiency in tax collections. If growth is to be sustained, policy prescriptions in the annual report need to be heeded by the next government.