Economic Highlights
New Delhi, 11 April 2016
RBI Rate
Cut
LOOK BEYOND
TO SPUR GROWTH
By Shivaji
Sarkar
The Reserve Bank of India cuts repo
rates by 25 points leading to a new low in interest rates of 6.25 per cent.
Petrol price was hiked by Rs 5.26 and diesel by Rs 2.98 in three weeks and
price index by some quirk logic hurtles down. Toll in Delhi itself increases from Rs 65 to Rs 100.
It also comes at a time when the
world is rattled by the leak of Panama
papers that expose the globes richest parking money at new havens. There is
also a revelation by RBI Governor Raghuram Rajan that elections in five States
lead to “money in people’s hands going up by Rs 60,000 crore”. The stock market
supposedly barometer of new steps was cool to rate cut. Stocks and rupee both
lost!
The combination is indeed peculiar.
Who loses and who gains needs to be assessed. The RBI was under pressure from
the industry, which is also the biggest defaulter, to cut rates for “faster
growth”. It had never been paying the high interest rates and has even before
the present regime of high bank NPAs, been defaulting and “restructuring”
loans.
The restructuring is a process that
leads to renegotiation and waiving usually a part of the accumulated interests
– a standard practice so that the principal lent by the banks remain secure.
Thus, high interest remains a myth for bulk creditors. For retail small loans
this remains a reality. In short, the poor suffer and rich gain.
The RBI move comes shortly after the
cut in small savings rates be it PPF, national savings certificates or kisan vikas patra. The new diktat would
lead to further cut in deposit rates and hurt senior citizens, housewives and
other small depositors real hard.
The RBI states that in March,
currency supply increases 48 per cent at Rs 2 lakh crore owing to elections in Assam, West Bengal,
Puduchery, Tamil Nadu and Kerala. At the same time, deposit growth comes down
from 10 to 9.9 per cent, the lowest in 53 years. (A year back the growth was
10.7 per cent). It indicates a declining deposit trend. The nation needs to
look at it as it is despite Prime Minister Narendra Modi’s initiative of JAM – jan dhan, aadhar and mobile direct cash
transfers.
Deposit rate fall is an indicator of
declining savings – a grave disorder. The trend almost coincided with
spiralling inflation since 2009 onwards and bank credit growth of high value
loans and default. This is also the time of high profits registered by
corporate, particularly in consumer-related goods. The errors in the pattern still
continue.
Price index may have come down but
prices remain high and are beyond the affordable limit of an average Indian.
Consumer companies find the volumes of sale coming down but strangely they have
maintained high profit margins. Further, the Real estate is a classic example.
Despite poor demand, fall in sales, spiralling unfinished flats and houses –
four lakh unsold units in Mumbai and Delhi-NCR and at least 20 lakh in rest of
the places – the prices are being jacked up, a clear move to fleece the common
man.
The
country’s top listed real estate
companies reported nearly Rs 70,000 crore in unsold inventory in March,
up from around Rs 64,000 crore a year ago. Here again bank’s deposits are
locked. Despite this Rajan says defaulters name is sacred and cannot be
disclosed but he doesn’t mind naming and shaming a poor farmer.
He should remember that a
liberalised economy is not a licence to loot and rock the basics. Monopolies in
every area are growing and the nation has undone the Monopolies and Restrictive
Practices law. The competition commission is a lame duck. Companies going
berserk on any count have virtually no law to fear for taming them as was
evidenced by the recent scam of non-repayment of over Rs 5 lakh crore loan –
simply stated as defalcation of poor man’s money
The nation has to correct the fault
lines. Mere reduction of interest rates doesn’t help anyone. Even the 1.5 per cent
rate cut since the rates were started to be lowered would result in a reduction
of nine EMIs for a 20 –year housing loan. One can realise that this would not lure
one to buy a flat.
Thus, the poor whether a
house-seeker or trying to save some money in banks remains a loser. The
unscrupulous rich taking loans have tremendous gain all the way. The Panama papers
expose another reality. Whosoever has some money wants a little higher return.
Parking such money in India
is not remunerative; experts in the government know it. Low interest rates lead
to losses. Senior citizens are the worst losers so are all other small
depositors. So if you keep rates low, savings rate reaches critical level.
This apart, the issue of taxes is also
there. There is nothing like black money. But if tax rates remain high, those
who have money would like to look for safe tax havens. The remedy is simple.
Income tax rates need to be either done away with or brought down to realistic
affordable level of around 15 per cent. If corporate tax can be reduced to 25
per cent why also not cut personal income tax.
In fact, if income tax is done away
with, the Government would be saving substantial amount that is spent on running
that department, refund of excess tax collected, policing the taxpayer and much
more. The loss would be around Rs 1.75 lakh crore in income tax collection. The
reduction in staff and other expenses would also come around Rs 1.5 to 2 lakh
crore. The hassle of policing, prosecution and tribunals would be passé. All,
leading to an additional saving.
The measures would not only save the
government a large sum of money – almost equal to its fiscal deficit – it would
also spiral activities and reduce the fear of an oppressive and possible not so
honest regime.
Similarly interest rate cut is not a
good solution. The US
is to increase rates shortly in the wake of better economic activity. If this happens,
there would be many, including foreign institutional investors (FII), who would
be soon flying with their money there. India also needs to learn from the Euro area. Low energy prices have supported its activity in
an environment, beset with uncertainties.
Indian economy continues
to be beleaguered with problems. These are complex and solutions are not easy.
But a holistic approach to pinpoint problems, possible solutions and
smoothening of process is required than looking for seemingly easy methods.--INFA
(Copyright,
India News and Feature Alliance)
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