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)
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