Fiscal Deficit Return to Original Sin

EPW Research Foundation Fiscal Deficit: Return to Original Sin Emerging Easiness in Liquidity THE severe liquidity strain, experienced by the money markets in India during the first quarter of the current fiscal year, continued until the first half of July and has suddenly given way to some easiness during the latter half of the month. Apart from the seasonal factors of supply of and demand for banks' resources, the emergence of underlying signs of slackness in demand for bank credit due to some possible slow-down in industrial investment and output activity is probably reflected in the current trends. To an extent, the massive year-end bulge in banks' balance sheets as of March 31 and the subsequent unwinding make it difficult to get a clearer view of the liquidity situation from the available banking data for the early months of the year. As the size of the year-end buildup of banks' deposits and advances, arising from interest crediting, draw-down of public sector funds towards the fag end of the year and window-dressing, has been growing year-by-year, the process of unwinding has also been increasingly getting prolonged. Last year by July 22, the declining trend in aggregate deposits from the March 31,1994 bulge had stopped; there was in fact a rise of Rs 1,486 crore by then. On the other hand, this year the aggregate deposits at Rs 380,160 crore continue to remain lower than the level of March 31, 1995 by as much as Rs 6,699 crore. Such a large swing in banking trends cannot be entirely explained by the last year's foreign exchange accruals and the consequential increase in bank deposits - a phenomenon which has been generally absent this year.