Former Finance Minister Yashwant Sinha has called for a big bang interest cut and said Reserve Bank of India (RBI) Governor Raghuram Rajan was acting arbitrarily by ignoring the majority opinion within the Central bank to bring down the cost of lending.
Joining the debate on the RBI’s reluctance to effectively trim the Repo rate despite decline in industrial production, Sinha said the most important challenge before the Indian economy was to revive the investment cycle.
Citing the Economic Survey 2015, Sinha said that large infrastructure projects worth Rs9 lakh crores were locked up due to a variety of factors which have curbed revival of the investment cycle. “This has several implications. The failure to ignite the investment cycle is also reason behind rise of banks’ NPAs and sluggish demand for industrial goods,” he said.
“Anil Ambani’s Reliance Power has to pull out from an ultra power project from Jharkhand. Many similar projects in highway and telecom sectors are also held up. These projects must be revived at the earliest and demand must be created for investment goods,” he said.
Sinha said as far as his knowledge goes the RBI Governor is ignoring majority opinion within the bank to cut the Repo rate. “I heard and read that four of the seven members of the RBI are interested in a major rate cut, but the Governor is not listening to them,” he said.
Sinha, who has presented seven Union Budgets as Finance Minister, said the only way India could stave off a crisis is by unlocking these projects and increasing the production of industrial goods such as power, petroleum, steel, cement etc. According to him, these measures will kick-start a demand revival cycle that will ultimately lead to revival of consumption and fuel growth. “It’s not happening because banks have stressed assets and corporate balance sheets are in poor shape. So the banks are not willing to lend and the corporates are not ready to borrow,” he said.
Sinha said the situation was becoming alarming by the day and moderation of interest rate has to be done immediately for a much-needed course correction and revival of the economy.
“It’s not a question of availability of funds but affordability of funds. Funds will become available if the interest rate starts going down. This is one side of the picture...
The other side of the picture is that WPI inflation is in negative territory, food inflation and CPI inflation are also below six per cent. Of course, there are challenges like monsoon, global economy and commodities price, but all these challenges will always remain there. We can sit down and say six months later something dangerous can happen so I’ll not take a rate cut decision. Well, when such a situation occurs, we always have the right to take recourse to remedial measures. But we can’t wait and watch for that. That’s where I differ with the RBI stance,” he said.
Sinha asserted that for revival of investment sentiment and investment per se, India needs a big doze of rate cut. “A mere nibbling at the interest rate will not do. In the past, the RBI twice went for a 25 basis points cut, which most PSU banks did not even pass down to customers. So I’m suggesting a hefty reduction of 1.5 basis points. It’ll not only have a direct impact on sentiment, but banks will be forced to pass it on. It also helps in planning corporate debt restructuring,” he said.
The former Finance Minister said, at present there was a great deal of criticism that most of the corporate debt is turning into bad debt. “When I was Finance Minister in the Vajpayee Government, we started a genuine corporate debt restructuring plan. The essential idea was that old high-cost debt will be retired and the corporates will borrow at lesser interest rate, which will add to the viability of their enterprises.
The corporates took advantage of it in a big way, and even agriculturists and others benefitted from it. I extended it to State Governments also. The corporate debt structuring then became a genuine programme and not a mere formality. I’m still convinced that if we follow this route and RBI is persuaded to go for hefty rate cut, the economy could be brought back on track,” he said.
“There will be immediate impact on investment sentiment and it will revive the investment cycle. One must be cautious, but one should not be cautious to a fault. I’ve great respect for the autonomy of the RBI, but unfortunately the RBI is cautious to a fault,” he said.
Sinha said that the RBI should not be obsessed with food inflation. “Food inflation can only be tackled by supply side measures like more import, growth in agriculture and better supply and distribution networks. Food inflation can’t be tackled by monetary policy but by fiscal policy alone. So it should be left to the Government to take effective steps to keep prices in check. But what the RBI has done has hurt the fundamentals of the economy.”
Sinha pointed out that the RBI went on hiking interest rate over a period of time to contain inflation, which adversely impacted the corporate sector, and industrial production. In the given situation when WPI inflation is in negative territory, the RBI must act decisively on the rate cut front.
On the RBI Governor’s argument that there must be enough gaps between the Repo rate and deposit rate to incentivize deposits, Sinha said by keeping interest rate high the depositors make only a notional gain because overall cost of living goes up.
“If deposit rate comes down, but you save on consumption, you make up for what you lose. For example, a retired person who is making Rs 20,000 on his deposit per month may suffer notional loss if deposit rates are brought down, but he will more than make up for it from the reduced cost of living.”