overall efficiency in financial intermediation. the increase in financial deepening in recent years and the attainment of overall efficiency in the use of resources suggest that financial intermediation in india has been relatively efficient. public investment has started increasing since 2003 - 04, reversing a long - period of declining trend that began in mid - 1980s. since 2003 - 04, private investment has also witnessed a large rise ( chart 2 ). thus, it is apparent that higher public investment may crowd - in private investment, leading to a virtuous circle. in view of this, it is important that the current fiscal consolidation process needs to be persevered with so that higher public investment is possible, which may further attract larger private investment. as a part of the financial sector reforms and in order to reduce financial repression, the required slr was reduced to the then statutory minimum of 25 per cent in 1997. the reduction in the required slr, in the presence of an auction system for the central government ’ s market borrowings, was expected to facilitate an increasing proportion of the fiscal deficit through borrowings at market - related rates of interest. although the envisaged reduction in the required slr was expected to enable banks to expand credit to the private sector, banks continued to make investments in government securities much in excess of the statutory minimum stipulated requirements. the slr holdings of commercial banks reached almost 42. 7 per cent by april 2004. the relatively lower order of growth in credit flow observed during this period, in retrospect, could be partly attributed to reduction in demand on account of increase in real interest rates, and turn down in the business cycle. in view of the various factors, extension of credit was perhaps perceived as risky by the banking system ; risk - adjusted returns appeared to favour excess holdings investments in government securities vis - a - vis bank credit. significant business restructuring and corporate deleveraging could have also reduced the need for bank credit to some extent. since 2003 - 04, there has been a significant jump in credit growth, which could be partly attributed to the step - up in real gdp growth, decline in interest rates, intensive policy initiatives to improve flow of credit to sectors like agriculture and, finally, strong demand for retail credit, particularly housing. the buffer of excess slr securities built up by banks during the period 1997 - 2003 provided the banks an opportunity to run down these excess investments in the period 2003 - 04 onwards to fund the step - up in credit growth.

##s to gdp reaching their lowest levels during the period 1997 - 98 to 2002 - 03, both at the central and state levels. reflecting the worsening of the fiscal situation, the public sector savings rate deteriorated in the second half of the 1990s, culminating into unprecedented dissavings during the period 1998 - 99 to 2002 - 03. this also pulled down the aggregate saving and investment rates in the economy. other major components of domestic savings – the household financial savings rate ( at around 10 per cent ) and the private corporate sector savings rate ( around 4 per cent ) – also stagnated during this period at the levels reached during the mid - 1990s. consequently, the investment rate also came down from the peak of about 26 per cent in 1995 - 96 to around 23 per cent in 2001 - 02. concomitantly, the growth process suffered a setback with the real gdp growth decelerating to 3. 8 per cent by 2002 - 03. public sector savings in view of the deterioration in fiscal deficits over the period 1997 - 98 to 2002 - 03 and rising public debt, and its adverse impact on public investment and growth, a renewed emphasis was laid on improving the health of public finances on a durable basis. in order to achieve this objective, fiscal consolidation has been guided by the fiscal responsibility and budget management ( frbm ) act, 2003 at the centre and similar fiscal responsibility legislations at the state - levels. since 2002 - 03, significant gains have been witnessed in the fiscal consolidation process, both at the centre and the states, partly as a result of the implementation of the rule - based fiscal policies at the centre and the states. a major factor contributing to the durability of the fiscal consolidation process underway in india in recent years has been the buoyancy in the revenues accompanied by some reprioritisation of expenditure with a focus on outcomes, unlike the expenditure compression strategy in most other countries as also the experience in india in the 1990s. the revenue augmenting strategy encompassed moderating the tax rates and broadening the tax base through expansion in the scope of taxes, specifically service tax, removal of exemptions, some improvement in tax administration with a focus on arrears recoveries. reflecting these measures, the tax - gdp ratio of the centre has steadily risen from 8. 8 per cent in 2002 - 03 to 11. 3 per cent in 2006 - 07 ( re ) and 11. 8 per cent in 2007 - 08 ( be ). the entire increase