Credit Status Quo

Credit is the important component for the high economic growth. With the economic meltdown it is natural that both the government and private sector are running out of liquidity. If the interest rates are high it is unlikely there will be adequate borrowing. One way to bailout the economy from the crisis is to keep the interest rate low. The RBI had done a good job by not hiking the interest rate as there is vocal support for that. The private sector should not be too panicky about the unavailability of credit because of the government’s intention to borrow heavily from the market or print more currency notes to meet the fiscal deficit.

The Times of India writes 29 July (2009)

In its credit policy review, the RBI has maintained a status quo on key interest rates. In the run-up to its quarterly stock-taking, there were
two takes on the RBI’s course. Some felt rates needed raising to beat a possible inflationary upswing resulting from sustained fiscal boosting of the economy. Others wanted rates cut, saying the economy wasn’t out of danger. Weighing both concerns, RBI has rightly chosen a mid-path. For one thing, a rate hike would have impacted materially and psychologically on entrepreneurs, dampening the pace of incipient recovery. For another, having steadily reduced policy rates, the RBI can keep its powder dry by promising need-based flexibility in monetary policy.

In its earlier macro-economic report, RBI patted India’s economic resilience in the face of the global recession. It pointed to ‘green shoots’ like positive growth in industrial production after a protracted period of negative trends, and higher core sector figures for June. Six infrastructure industries grew by 6.5 per cent. This performance, especially the sharp pick-up in cement and steel, indicated revived economic activity. Construction, for which demand remains strong in rural and semi-urban sectors, has emerged as a bright spot in particular.

The finance ministry seems to be taking no chances though. It has announced a 1 per cent subsidy for low-cost home loans. Developers are extended a tax holiday on profits from time-bound housing projects, in the hope the benefit will percolate to consumers. This is a second stimulus for realty, on which nearly 270 industries depend for business. The aim, clearly, is to cheer the aam aadmi while boosting a sector whose dynamism has strong multiplier effects in terms of growth and job creation. The intra-sectoral thrust is rightly on affordable housing, an area where demand is undersupplied. Realtors will do well to respond, adapting to a slowdown-hit market environment where demand for high-end housing is down. There are also extended tax breaks for developers of industrial parks, welcomed by industry. Given the likelihood of a below-normal monsoon hitting agricultural growth, these measures are a well-timed attempt to rev up an economy on the rebound.

One worry is growing public debt, which raises fears of bank lending to private players being crowded out. The RBI claims there’s enough liquidity in the system to lend sufficiently both to industry and government. The fact, however, is that the government’s spending commitments seem to keep ballooning as, for instance, with the latest home loan subsidy. The wager is that stimulus-induced growth will bring in money in terms of higher tax collections and private investment. This gamble shouldn’t preclude keeping an eye on fiscal health, ensured by resource mobilisation through adherence to reforms.credit-policy

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