#dna edit: Room for action

Economic pundits have argued for nearly two years now that the Reserve Bank of India (RBI) holding on to high interest rates is turning out to be a dampener on growth. And that this cautiousness about inflation is nothing but timidity. Indian industry and business too have been saying that if the RBI were to reduce rates, it would help in reviving the economy. The argument is simple: it is difficult to borrow from banks at high rates of interest to finance new projects or expand the old ones. As finance minister P Chidambaram did not hesitate to let his view be known that it is time to slash bank interest rate which in itself is a strategy to beat economic slowdown.

The incumbent finance minister Arun Jaitley has kept his own counsel and not aired his views on the matter. Though there were indications that he would have liked a reduction in interest rate, which also would have been perceived as the RBI’s vote of confidence in the new government. But Jaitley does not seem to have pressed the matter. And when the RBI governor Raghuram Rajan stuck to his guns there was not much dissent in the finance ministry.

Rajan, for his part, has intelligently countered the charge made against the central bank that high interest rates serve as a speed breaker to the economy which was raring to go especially since the ascendancy of the Narendra Modi government to power. The regime change had generated high expectations among the captains of industry and business. Rajan, in his statement, argued that there was enough liquidity and that banks are literally sitting over an expanding cash trove — bank deposits being much higher than bank loans. The RBI governor has also indicated that banks can lower their interest rates without awaiting the nod of the central bank because the rates at which banks borrow have been sufficiently adjusted leaving enough leeway. The other interesting disclosure in the bank’s statement is that companies — instead of turning to the banks for loans — are raising money through issuances and external borrowings. Neither retail banks nor industry, it would seem, is willing to take risks.

The government believes that the RBI should acknowledge the market sentiment and give up its mulish adherence to the high interest rates. The bank cautioned that there would be pressure on food prices in the next quarter due to the less-than-normal southwest and northeast monsoon.

Rajan did not mince words when he said that there is much that the government can do to improve the situation. He said: “A durable revival of investment demand continues to be held back by infrastructural constraints and lack of assured supply of key inputs, in particular coal, power, land and minerals. The success of ongoing government actions in these areas will be key to reviving growth…”

After six months in office, the Modi government cannot afford to continue to be content with the glow of the impressive May electoral victory. The Prime Minister and his ministerial colleagues will have to implement decisions to get the infrastructural projects going. And business will have to translate the positive sentiment into new ventures.