Economic Highlights

New Delhi, 19 September 2015  

Vital To Raise Rates

USHER NEW DIRECTION TO ECONOMY

By Shivaji Sarkar

The sudden change in the US Federal Reserve’s decision against rate increase apparently under pressure from the corporate lobby should not deter India from raising rates, as the volume of the two economies is different. Possibly, America has not taken a wise decision in putting off the interest rate increase. Specially, as according to the Fed, the economy is gradually heating up.

Clearly, the decision is stop gap as the Fed is likely to take a fresh view in December. Recall, US interest rates remain almost at zero per cent since the 2008 recession. And despite the Chinese Yuan’s devaluation and cheaper imports, the US economy has heated up to 1.2 per cent as its employment increases and prices rose.

Some state, the US has succumbed to its corporates. Having lived on a low interest regime since 2006, they do not want to pay a higher rate. But lower interest rates would hurt the average US worker, whose savings are dwindling.

The latest hope almost after nine years would again force workers to lose a lot on their meagre savings. As most largely have part-time jobs, the workers are facing a double whammy. They are being paid less and the little savings they have fetch lower yields. Thus, the Fed’s move will hit its common man’s economy hard.

Undoubtedly, the US Fed’s decision has cheered the Indian stock markets. However, realistically speaking it is not a sign to be happy. Think. The RBI Governor Raghuram Rajan almost simultaneously came down heavily on the Indian businesses for their ‘jugaad’ --- unprofessional short-cuts to reap profit.

Notably, India has no reason to follow the US Fed. The RBI has a duty to protect its large number of average, and in most cases, poor savers. If India fails to increase interest rates, its people’s economy is likely to be hit hard.

Especially as the stock market increases does not help the average investor. He does not put his money in stocks. But this way he would be forced now to invest in mutual funds while insurance put him in larger peril.

Pertinently, the American move is to put countries like India at greater risk. The rate rise would have encouraged people to spend less and save more. It would have put a check on US corporate profits and also kept prices low. Now the prices expected to be higher are likely to heat up the world economy.

The Fed Chairperson Janet Yellen talked in nuances at her press conference indicating that she still believes it appropriate to begin raising rates. The improved financial health of households and banks means that slightly higher rates should not cause too much pain.

Besides, the Rupee is gaining on the US Fed’s decision, which is being viewed as a positive sign. But it could reverse as well. How long can India depend on the largesse of international powers?

Importantly, the Rupee tumbles at the slightest shock. But its rise would not add to exports as demand is low in major global markets. So far, India has done little to allow strengthening of its Rupee. Now strong steps are needed.

If the Rupee continues its recent gains, it might change dimensions. That requires many policy changes including going slow on the so-called “reforms”. As the Government expects the economy to grow over 7.5 per cent.

On the domestic front, the Government is concerned about less than desired growth in the manufacturing and industrial sector. The farm segment owing to deficient rain might have about 30 million tonnes less yield. This apart, pressure from the organized corporate also prevents the Government from taking a pragmatic step.

Consequently, the Government has to weigh its options. There is a credit slowdown in public sector banks which are burdened with the highest non-performing assets (NPA). Recall, the seven-bank consortium had in mid September recorded Rs 7500 crore loan to Kingfisher as losses!

On the other hand, according to the RBI’s annual report private sector banks with minimum NPAs posted higher credit growth. This is something serious.

Besides, credit rates are at their lowest. Less than a dozen large companies account for over 95 per cent of NPAs and any cut in rates would only benefit these companies in a huge manner. But this would be at the cost of the poor depositors, who have lost heavily as large industrial houses pilfered their deposits and now they earn less because of lower interest rates.

Also, the ordinary investor has to shell out more on taxes to fill the Government coffers so that it can recapitalize the banks. As it stands, domestic banks roughly require Rs 240,000 crore to maintain capital adequacy ratio by 2018 --- almost equal to the official Rs 3 lakh crore NPA. Already, the Government has committed to infuse Rs 25,000 crore this year.

Furthermore, the NDA cannot be soft on pilferers of public sector banks (PSBs). States Credit Suisse: There are corporates which have not paid back a dime to banks since 2008! Worse, a part of the loans have reportedly also been written off.

Indeed, actual NPAs could touch about Rs 5 lakh crores. Therefore any cut in interest rate without realising the loans from the largest borrowers could end up with the collapse of the banking industry and ruination of the Indian economy.

Moreover, lower interest rates are also causing problems of lower savings. It is hurting senior citizens, pensioners, women, average entrepreneurs and the poorer people the most.

Remember, during the 1960s small savings fuelled the Indian economy. This still remains fundamental. Even as it appears that large companies are using devious methods once again to rob the poor.

Significantly, a higher rate would ensure not only having higher savings but also flow of funds from various other economies. Succinctly, it would pave the way to invite all those who have money to put it in India.

Some change in rules for allowing specific SAARC and other countries people to put money in term deposits should also be considered. This would create a new economic brotherhood, apart from adding strength to the economy.

Certainly, efforts have to be matched to make large borrowers repay all that they have gobbled up over the years. Hence, the US Fed move is not an invitation to cut repo rates. India need neither be gleeful nor panic. Raising rates can turn out to be the beginning of a new economic direction. ---- INFA

(Copyright, India News and Feature Alliance)