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: Interest rates are difficult to pin down, since there is typically a spectrum, rather than a single number. However, one can often identify benchmark interest rates set by central banks. Websites on cross-country interest rates show that, in Europe, if one leaves out Iceland (15.0%) and Hungary (8.25%), such interest rates range between 2.5% and 5.5%. In North America, the range is between 2.25% and 3.5%. And in Asia-Pacific, the range is between 3.5% and 9.0%, with India at the higher end. The RBI website tells us the deposit rate is between 7.50% and 9.60%, while prime lending rate (PLR) is between 12.75% and 13.25%. How much is the inflation rate? The point-to-point WPI (wholesale price index) is neither here nor there, and shouldn’t be used for policy purposes. It’s a separate matter that there is hype over WPI-based inflation crossing 12%. The trend rate of inflation is no more than around 7%, substantiated by what CSO implicitly accepts as the GDP deflator. Therefore, India’s interest rates are high, both in cross-country comparisons and in terms of what real interest rates should be. In this age of globalisation and integration, the argument that India is a capital scarce country will not wash. In any event, just recently, India has been exporting capital.
There is enough evidence to show that hikes in interest rates have hurt growth. This shows up in both investment and consumption figures, with the latter across-the-board, rather than concentrated in specific sectors. Indeed, had it not been for consumer non-durables, IIP (index of industrial production) would have looked much worse. Manufacturing has been hurt and it has hurt small-scale manufacturing more, since this segment doesn’t have access to either global capital or public equity. It is time for the government to plead mea culpa and admit a mistake was made. You don’t cool an under-heated economy. Ever since the Indian growth trajectory broke away from a trend of 6.5% and touched 8.5%, there have been arguments that this growth is unsustainable. What that word means is anyone’s guess, even when it is couched with reference to the environment. Typically, the expression is used when people don’t understand what is driving growth. But we do know what is driving Indian growth—higher savings/investment rates, greater efficiency in capital usage, shift away from agriculture and allied activities, export growth, labour input and entrepreneurship. Hence, we know why 8.5% growth is happening...
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