RBI should go for low interest rates

Only growth has the potential to cure our financial ailments, and boost Make In India programme too.

“Growth can wait”seems to be the favourite refrain of RBI Governor Raghuram Rajan. Before the previous NDA government demitted office in 2004, it had been successful in bringing down the interest rates to low levels. The economy and business sentiments were also booming at that time.

Later on, inexplicably, interest rates were increased by more than a dozen times during UPA-II, particularly when D Subba Rao was the RBI governor. It is no secret that high interest rates cripple business, especially industry. The good returns on fixed deposits and other savings instruments also encourage the public to put money into savings instead of trying to recycle earnings for some productive work.

This way, on one hand you are incentivising people by providing higher returns for keeping the surplus funds dormant, while on the other hand the costly finance provided by financial institutions dampens the spirits of business as well as entrepreneurship.

Both the anomalies can be rectified by a simple remedy of reducing the interest rates. The automobiles, housing, realty and so many allied sectors will witness a kick start towards growth immediately. Not for nothing the Central Bank of Japan has introduced a negative interest regime on earnings – if you want to keep money in the savings, you will have to give bank some amount as charges as a punishment for not putting it to some productive use. The European Banks have been practicing it for at least 10-11 years now.

Naturally, when the new government took over on the plank of development, the first thing the business expected it to do was to reduce interest rates as one of the initial steps to spur growth. As the demand for softening the interest rates grew louder, the dampener came from Rajan: “First, we have to tackle inflation, growth can wait”. Now it is the 15th consecutive month the WPI (whole sale price index) is negative and the prices of crude have touched rock bottom. All industrial products and items have been seeing negative inflation. Still no signs of interest rate reduction.

Edible items
The only thing which remains costly is the edible items. God alone knows how does one tackle inflation of agricultural products by controlling interest rates. One may not buy a car or a house for higher interest rates, but would anybody stop buying potato or tomato even if the interest rates were 100%? Whatever small decrease in interest rates during last one year or so is too little.

As the clamour for interest rate reduction continued to grow and the inflation logic did not hold good any more, Rajan came up with another one: “The government has to tackle the fiscal deficit first, only then interest rates can be lowered, the growth can wait”.

Then just a few days ago, he said: “If you ask me what is more important, growth or cleaning of banks’ balance sheets, I would say cleaning of banks’ balance sheets has to take priority. Grow-th can wait”. And his latest masterstroke: “We will not devalue our currency for increasing exports, the way China, Japan and Korea did. Growth can wait”.

Seems growth is the last thing on the RBI governor’s agenda or perhaps it is not there in his priority list at all. One is at a loss to understand that the government which came to power with such a huge mandate on the plank of development and for bringing acche din, seems to be not bothered about the growth at all. All the gains in the sectors of power, defence, railways, highways etc will be lost if they are not backed with solid reforms in financial sector.

Sadly, there have been hardly any positive or thoughtful steps taken by finance ministry in last 21 months. Prime Minister Narendra Modi also has to appreciate that “Make in India” would not happen by mere rhetoric. The windfall gains because of increase in excise duty on petroleum products, coal block auctions and 3G spectrum auctions are keeping the government coffers full, making it complacent, whereas the dismal performance in direct and indirect tax collections should have rung alarm bells.

When the IIP (Industrial Production Index) is shrinking, WPI is negative, sensex is falling, NPAs (non productive assets) are mounting and the banks’ bad loans are increasing to staggering proportions – no amount of treatment will help.

Neither bringing of black laws like Bankruptcy Code 2015, will help. Rajan should have been the one piloting the engine of growth while he was proving to be the one permanently red-flagging the growth. His hawkish approach to the economy has proved to be disastrous. It is to be understood that it is only growth which has the potential to cure our financial ailments, and the momentum thus gained will give boost “Make In India” programme as well.

The juggernaut of growth, which when unleashed, automatically pulls all the parameters of the economy to their desired slots. No stone should be left unturned including reduction in interest rates, to spur gr-owth. Because, development or growth can’t wait. The aspirati-ons of a billion people also can’t.

(The writer is a technocrat and a small-scale entrepreneur based in Ghaziabad, Uttar Pradesh)