Government shopping spree

There is nothing much to talk about money growth in FY12 except for government borrowing which breached all records; reaching an all time yearly high of Rs1.2 trillion - more than twice of the worst year of the previous regime (FY08). The stock increased by a massive 40 percent last year to take net government borrowing to Rs4.3 trillion. This is alarming; and not sustainable by any means. Continuation of such practices could very easily lead to a state of hyper inflation and currency destabilisation. Some studies reveal that around one fourth of inflation last year was due to the high powered money creation. That is equivalent to government subsidising its domestic debt at the cost of general consumers. The share of monetisation in the overall inflation pie is going up with subsiding supply side pressures owing to receding commodity prices and demand pull by increasing government reliance on banking system. Last year, government borrowing was almost entirely dependent on scheduled banks. This year, three fifths of the same came from the banking sector, while the remaining amount was borrowed from the central bank; it borrowed Rs692 billion in the outgoing fiscal. The real whammy is the fact that governments appetite for credit has doubled and of this, Rs505 billion was borrowed from the central bank. The picture becomes dimmer by dissecting the components of money supply - which is increasingly skewed towards domestic assets creation. The NFA to NDA ratio is down from 1:7 to 1: 14 in just two years. The reason is simple - after, on average, yearly increase of Rs193 billion in previous two years, last year net foreign assets were down by Rs254 billion. On the other hand yearly average NDA flows were Rs586 billion in FY11 versus Rs1.2200 trillion in FY12. This explains the overall money supply increase of Rs947 billion (14.14 percent) last year close the flows of previous year Rs918 billion (15.89 percent) but the composition was a bit different. The good thing is that the money going out of the system through piling currency in circulation was marginally down in the recently concluded fiscal from Rs206 billion to Rs172 billion. This could be attributed to slowing growth in rural incomes as commodity prices continue to cool off after peaking in earlier periods. Lower withholding tax on cash withdrawals may also be a contributing factor to the stated trend. Despite all these issues, there are signs that the economy is picking up, evident from the fact that credit to private sector has doubled to Rs235 billion in FY12; although it is still a fraction of what it was in the good old days (FY05-FY07). There are also some indications that economic activities picking up especially in the consumer segment.