Reserve Bank governor Urjit Patel showed prescience by keeping interest rates unchanged in recent monetary policy announcements as he wanted to see how inflation played out after demonetisation and the monsoon. This made him unpopular with India Inc, but he was proved correct, with inflation numbers at a 15-month high and industrial production figures down to half of October’s figures. The main culprit are vegetable prices as they hit by unseasonal rains. Had Dr Patel given industry access to easy money with a rate cut, inflation would been even higher. India Inc’s reasoning behind demanding a cut was that this would enable it to compete for exports with the emerging economies that enjoy low interest rates. But as one of Dr Patel’s predecessors has said, India Inc has its own agenda while the RBI has to think of the country.
India Inc may have a point but it’s a fact that interest rates are just a miniscule part of the cost of production. It must increase its efficiency quotient and incorporate good practices in manufacturing, which means steps like cutting down wastage. The RBI has always said monetary policy should be accompanied by fiscal policy if the wheels of the economy are to be greased. Monetary policy alone isn’t enough. On this score, the government was clearly found lacking. Both fuel and food inflation, for instance, is the government’s responsibility. It didn’t reduce fuel prices when they were low globally, and now that prices have started rising there is little that it can do.
The real victims of high interest rates are small and medium industries and the unorganised sector. While large corporates have access to low-cost bank funds, the SMEs don’t. Banks charge them much higher rates and don’t always entertain their requests. They must borrow from the open market or other sources at rates ranging from 12 per cent to as high as 23 per cent.
The Narendra Modi government has taken note of this problem of SMEs, but its initiatives are still far from solving their problems. It must be remembered that the SMEs are the economy’s backbone, and major providers of employment. They were hit hard by such hare-brained policies like demonetisation and the hasty introduction of the Goods and Services Tax (GST). There are indications that they haven’t yet recovered from this double whammy inflicted by the government. It’s necessary therefore to focus on this segment in the interest of both inflation and industrial production.
There’s a silver lining ahead as the cuts in GST on various items could lower prices. In addition, the government’s high-powered advisory committee should soon come out with its recommendations that could kickstart growth and employment. This may be reflected in the next IIP and inflation figures.
