Look beyond rate cut to spur growth

The RBI cuts repo rates by 25 points leading to a new low in interest rates of 6.25 percent. 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 supposed barometer of new steps was cool to rate cut. Stocks and rupee both lost.
It is a peculiar combination. It needs to be assessed who loses and who gains. The RBI was under pressure from the industry – also the biggest defaulter – to cut rates for “faster growth”. Industry had never been paying the high interest rates. They, even before the present regime of high bank NPAs, have 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 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 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 dictat would lead to further cut in deposit rates and hurt senior citizens, housewives and other small depositors hard.
The RBI states that in March, currency supply increases 48 percent at Rs 2 lakh crore owing to elections in Assam, West Bengal, Puduchery, Tamilnadu and Kerala.
Deposit growth at the same time comes down from 10 percent to 9.9 percent, the lowest in 53 years. (A year back the growth was 10.7 percent). It indicates a declining deposit trend. The nation needs to look at it as it is despite prime minister Narendra Modi’ initiative of JAM – jan dhan, aadhar and mobile direct cash transfers.
Deposit rate fall is an indicator of declining savings – 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 average Indian. Consumer companies find volumes of sale coming down but strangely they have maintained high profit margins.
The real estate is a classic example. Despite poor demand, fall in sales, spiralling unfinished flats and houses – four lakh unsold units in Mumabai 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 that Rajan says defaulters name is sacred and cannot be disclosed but he does not mind naming and shaming a poor farmer.
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 lame duck. Companies going berserk on any count have virtually no law for taming them as was evidenced by the recent scam of non-repayment of over Rs 5 lakh crore loan – simply stated it is defalcation of poor man’s money
The nation has to correct the fault lines. Mere reduction of interest rates does not help anyone. Even the 1.5 percent 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 remain loser. The unscrupulous rich taking loans have to 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 have the worst loser so are all other small depositors. So if you keep rates low, savings rate reaches critical level.
Apart the issue of taxes are also there. There is nothing like black money. But if tax rates remain high, those who have money they would like to look for tax havens. The remedy is simple. Income tax rates need to be either done away or bring down to the realistic affordable level of around 15 percent. If corporate tax can be reduced to 25 percent why also not cut personal income tax.
In fact, if income tax is done away, the government would be saving substantial amount that is spent of running that department, refund of excess tax collected, policing the taxpayer and many 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 done away. It would be 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 it happens there would be many, including foreign institutional investors (FII), who would be 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 is still beset with problems. These are complex and solutions are not easy. But a holistic approach to pinpoint the problems, possible solutions and smoothening of process is required than looking for seemingly easy methods.