Despite RBI keeping rates unchanged at 6.75 percent ignoring clamour by Indian industry to lower it, the US Boeing has decided to start manufacturing of medium multi-role combat aircraft (MMRCA) to boost make in India. It will create an eco-system to build fighter jets, something that got a jolt due to tough bargaining by the French Dassault on sale of 36 Rafale aircraft.
The Boeing decision is futuristic as manufacturing in India would create a large market for it. The aggressive posture comes at a time when it feels that India would be able to sustain its high-cost operations and delayed decision of Rafale.
Typically, a fighter squadron in Indian Air Force has 16 aircraft (plus two in reserve). By next March, the air force will have retired about 50 aircraft without adding any fighter jet to its inventory.
There are shortages. The IAF will be retiring the Mig-27MLs that have not been upgraded in the last 2-3 years. An order has been placed for 120 Tejas MK II though they are not exact replacements of hi-tech needs.
Does it have a link the RBI governor Raghuram Rajan’s decision? Apparently, it is linked to pragmatic approach of not lowering the rates in an unstable situation. But Rajan says that there is a beacon of stability.
Rajan’s concern for possible inflationary impact of the seventh pay panel recommendations seems genuine. He has unfortunately linked his decision to the government limiting its deficit. He is seemingly making political statements that are not the mandate of RBI.
In reality, the stingy approach of the government in 2015-16 has led to problems in many of the social sector areas. As private investments are not coming, the government is under pressure to increase its expenses and take a liberal approach to deficit. The larger view is that if the government has a little larger deficit, it would pace up economic development. As a consequence the government 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 uncertainty. If the US raises rates and India lowers it, there might be capital outflow from India. Already the foreign institutional investors (FII) have withdrawn over Rs 15,000 crore in 2015-16, the highest in seven years leading to a crash in stock markets.
If rates are cut, something the industry is demanding, it may lead to mayhem in the stock market. This is surprisingly so despite domestic institutional investors (DII) investing Rs 60,368 crore. This is because DIIs are coming in only at lower levels. The sellers, mainly FIIs, are more aggressive.
Rajan has to ensure not only infusion of funds but also protect the small investors, whose savings have greased the Indian economy at least since 1960s. The small investors of all sorts – senior citizens, households, women and marginal savers – are developing a feeling that their money is considered dirt cheap and given away to industrialists, who willfully default on payment. This makes their savings insecure and cut in rates add to further problems.
They need protection of at least a minimum interest rate of 9 percent. Cheaper rates have led the industry to sit over their reserves as borrowing becomes cheaper posing a threat to the banking system suffering from an official NPA of over Rs 3 lakh crore and unofficial Rs 5 lakh crore. A higher lending rate, above 10 percent, would act as safety shield. It would also prevent the need for repeatedly recapitalizing the public sector banks by the government.
The latest move to set up “bad banks”, which would purchase the NPA accounts, is likely to help the banks reduce NPA. But they would have to go for a “haircut” – shear off one-third of the lending – almost Rs 1 lakh crore. Again it hits the poor as bankers raise charges on various instruments and tend to give lower rates on deposits.
Now banks in the country have to tighten their belts and ensure efficient functioning. It is just not to ensure returns on small savings but also to create the confidence of the companies like Boeing that Indian banks, when need be, would stand by their multi-billion operations.
The F-A 18 is the mainstay of the US navy. India is also keen on a blue water navy. The manufacturing hub to be created would require support of the government either through budgetary support or borrowings for public sector banks. So there is need for healthy banks that would be able to stand the large funding requirements for make in India, start-up India, digital India, stand-up India and many other initiatives.
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. It has also to ensure that banks grow to match the needs of some of the global giants, who are eyeing to make a base in India.
Rajan’s statement of “beacon of stability” is stated to be an indication of stable and sustainable growth. The RBI put the growth at a higher level of 7.4 percent than the government envisaged at 7.2 percent. Fiscal 2016-17 could be 7.6 percent, RBI hinted. Does this mean more large foreign investors like Boeing would be coming? There is a possibility. The failure of Dassault now many aver is not due to weaknesses of the Indian system. The Boeing is said to have a vision and that is why it is keen on coming to India.
Along with Boeing, Swedish giant Investment AB Kinnevik, known for backing German firm Rocket Internet, is looking at investing in technology-based ventures in areas like education and healthcare. Kinnevik aims to increase share of investment to a tenth of its global operation over the next five years.
It seems new investors trust India more. It also indicates that the indigenous corporate demands for lowering rates are not rational. Rajan has to look at these trends to firm up rates for stable growth through Make in India and strengthening rupee.
