Economic Highlights
New Delhi, 5 February 2016
MNCs Trust RBI’s Rajan
GUNG HO ON MAKE IN INDIA
By Shivaji Sarkar
Despite the Reserve Bank keeping repo
rates unchanged at 6.75 per cent, ignoring the industry clamour for lowering
it, US conglomerate Boeing has decided to start manufacturing medium multi-role
combat aircraft (MMRCA) to boost Modi’s Make in India. It will create an
eco-system to build fighter jets, something which got a jolt thanks to tough
bargaining by French Dassault vis-à-vis
sale of 36 Rafael aircrafts.
Notably, Boeing’s decision is
futuristic as manufacturing in India
would not only create a large market for its aircrafts but also its aggressive
posturing would be able to sustain high-cost operations due to Rafael’s delayed
decision.
Typically, a fighter squadron in the IAF consists of 16
aircrafts (plus two in reserve). But by next March, it would face shortages as
50 Mig-27MLs aircrafts which have not been upgraded in the last 2-3 years would
be retired without adding any fighter jets to its inventory. Already, an order has been placed for 120 Tejas MK II though they are
not exact replacements of India’s
hi-tech needs.
Questionably, does this have any
link with RBI Governor Raghuram Rajan’s decision? Apparently, it is linked to a
pragmatic approach of not lowering rates in an unstable situation. No matter, Rajan
asserting that there is a beacon of stability.
Undeniably, Rajan’s concern for a possible
inflationary impact of the Seventh Pay Commission’s recommendations seems
genuine. Unfortunately, however, he has linked his decision to the Government
limiting its deficit. Whereby, he is seemingly making a political statement
which is not the RBI’s mandate.
In reality, the Government’s stingy
approach in 2015-16 has led to problems in many of the social sector areas.
As private investments are not coming, the Administration is under
pressure to increase its expenses and take a liberal approach to deficit. The
larger view being if the Government has a little larger deficit, it would pace
up economic development as it would be earning higher revenues.
Besides, the RBI has also to think
whether interest rates should be lowered or firmed up in view of the US Fed
Reserve’s uncertainty. If America
raises rates and India
lowers them, there might be capital outflow from India. Already the foreign
institutional investors (FII) have withdrawn over Rs 15,000 crores in 2015-16,
the highest in seven years leading to a crash of the stock market.
Also, if rates are cut it might lead
to mayhem in the stock market, notwithstanding domestic institutional investors
(DII) investing Rs 60,368 crores. This is because DIIs are coming in only at
lower levels. The sellers, mainly FIIs, are more aggressive.
Thus, Governor Rajan has to ensure
infusion of funds alongside protecting small investors whose savings have
greased the economy since the 1960s. Small investors, namely, senior citizens,
households, women and marginal savers are developing a feeling that their money
is considered dirt cheap and given to industrialists, who willfully default on
payments. Thereby, not only making their savings insecure but also by cutting rates
it aggravates further problems.
Pertinently, these investors need
protection of at least a minimum interest rate of 9 per cent. As cheaper rates
have resulted in industry sitting on their reserves as borrowing becomes
cheaper thereby posing a threat to the banking system. As it stands, the system
is suffering from an official NPA of over Rs 3 lakh crores and unofficial Rs 5
lakh crores.
Notably, a higher lending rate,
above 10 per cent would act as safety shield and prevent the need for the
Government to repeatedly recapitalize public sector banks.
Moreover, the move to set up “bad
banks” which would purchase the NPA accounts is likely to help banks reduce their
NPA. But they would have to go for a “haircut” --- shear off one-third of the
lending --- almost Rs 1 lakh crores. Again, this will hit the poor as bankers
raise charges on various instruments and lower rates on deposits.
Undoubtedly, our banks have to tighten their belts and
ensure efficient functioning. Their job is not only to ensure returns on small
savings but also to create confidence of companies like Boeing. In addition, when
need be, they would stand by their multi-billion operations.
Notably, India
is also keen on a blue water navy and the FA 18 is the mainstay of the US navy. Therefore,
its manufacturing hub would require the Government’s support either through
budgetary prop ups or borrowings from public sector banks.
Consequently, there is need for healthy banks which would be
able to withstand the large funding requirements for the Make in India, Start-up
India Stand-up India, Digital India and many other initiatives.
Clearly, the RBI has a difficult challenge as regulator for
banks. If it does not strengthen the banking structure, the dream of making the
country a hub of manufacturing might falter. Simultaneously, it also has to
ensure that banks grow to match the needs of global giants, who are eyeing a
manufacturing base in India.
Hence, Rajan’s “beacon of stability” statement is an
indication of stable and sustainable growth. The RBI has pegged growth at a
higher level of 7.4 per cent even as the Government envisages 7.2 per cent. In
fact, the RBI Governor hinted 7.6 per cent for a fiscal 2016-17.
Does this mean more large foreign investors like Boeing
would be coming? This is a possibility. Boeing is said to have a vision and
that is why it is keen on coming to India as also Swedish giant
Investment AB Kinnevik, known for backing German firm Rocket Internet.
Reportedly, it is looking at investing in technology-based ventures in areas
like education and healthcare. Kinnevik aims to increase its share of
investment to a tenth of its global operation over the next five years.
All in all, it seems new investors trust India more. This
also indicates that indigenous corporate demands for lowering rates are not
rational. Governor Rajan has to look at these trends to firm up rates for
stable growth through Make in India
initiative and strengthening the Indian rupee. ---- INFA
(Copyright,
India News and Feature Alliance)
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