While the Indian economy has been able to sustain itself in the last quarter of 2017, favouable pricing could ensure growth is accelerated even further
The interest rate hike was a long awaited decision. It was needed to check the rising prices, pep up the fledgling rupee, redirect the bank finances and help the country correct its course in a critical year. It will help senior citizens and depositors who have higher interest accruals and hedge the banks thereby resulting in increased savings.
The rise came after four long years and is the first one under the National Democratic Alliance (NDA) rule. There were five rate cuts during former RBI Governor Raghuram Rajan’s tenure — four of 25 basic points (bps) and one of 50 bps and two of 25 bps each by current RBI Governor Urjit Patel. The last one was in August 2017.
Those who are worried about an increase in home and consumer loan rates have little to worry about. Most banks, including the State Bank of India (SBI) have already raised the lending rates and there is little scope to raise it further. The decision of the Monetary Policy Committee (MPC) to raise the interest rates by 25 bps was unanimous; stressing that it was a dire need. The minimum interest rate was thus raised to 6.25 per cent.
The Government has reasons to feel happy regarding this change since spiraling prices are never a good indicator. The way the stock market spilled after the rate hike is an indicator that the decision was appropriate. Markets too have responded favourably.
Most importantly, this hike will help the banks. Had the rates not been this low during previous years, there was a chance that the 2007-2008 subprime crisis in the US-EU would not have taken place. Banks in India too would not have gone into over 80 per cent NPA or about Rs 12 lakh crores. Higher interest rates help banks. Because Indian corporate post-2008 got easy loans, many are struggling today.
High rates are also likely to help the rupee gain strength, which lost over 4.8 per cent. It will also attract foreign capital. Perhaps more such steps and a stronger rupee will help India lower its import bill. The RBI cited pressures from soaring crude and commodity prices. It estimates inflation to rise to 4.9 per cent, touching the RBI tolerance of five percent. The Central Bank retained a neutral stance, signaling it would be flexible in its response to challenges without stifling nascent economic recovery. So it maintained the cash reserve ratio at six per cent. It raised the inflation forecast for the fiscal year because core inflation remained firm even though the threat from food prices had eased. The RBI step is an indication that if the inflation does not sober down, it might further raise the rates to keep the economy on track.
It is logical that if prices of commodities in the international market fall, the benefit will be passed on to the consumer. This is not happening in the case of either petroleum products or gas. The RBI has expressed its displeasure on the issue. There certainly has been a marginal rise in the cost of Indian basket for oil. It has risen to $74. This, coupled it with retail rates, cannot result in a happy state.
The RBI policy indicated a correction for the petroleum product and gas prices. Though the Central Bank was less vocal on it, its disapproval was evident. It hit the Government. Take the Ujjwala. The gas prices have shot up to Rs 750 from Rs 350 in three years. It entails cost on the Government and beneficiaries despite the direct benefit transfer (DBT) or the subsidy paid to the four crore new families who have the connection. Similarly, the Monetary Policy Committee (MPC) was eloquent on many other subjects like the railway fares being increased indirectly through the dynamic fare mechanism, higher platform ticket costs and denial of many concessions. It has to take a call on many other services like toll roads andvarious other tolls and levies.
Road cess on petrol continues in addition to high taxes and unnecessary price hikes of daily items. If the prices of petroleum products are reduced, the benefits will be passed on to the consumer since after GST, prices of many commodities were lowered, despite 28 per cent levy, one of the highest rates. The highway toll pricing is irrational. The National Highways Authority of India (NHAI) has been unable to justify its annual five to 10 per cent hike. The ground on which it has been linked to inflation is flimsy. Toll is levied to recover the construction cost.
Each year the balance gets reduced but profits of NHAI and it concessionaire soars. Thus, there are grounds for reducing tolls up to 75 per cent on most highways. This will result in reduction of transportation costs and relieve inflation pressures. This also means that despite such adverse conditions, as the RBI notes, economic activity has shown sustained revival. With favourable pricing, the growth can further accelerate.
(The writer is a senior journalist)