Among many of the wishlists declared by the finance ministry in last two months, some of them have actually been announced and will be implemented once passed by Parliament. But the most prominent one was the lowering of the repo and reverse repo rates by the Reserve Bank. But this has been ignored in favour of lowering the cash reserve ratio which it has done on last few occasions. The argument offered by RBI is that it would release an additional fund of R17,500 crore, which is not an adequate prescription to reverse the downward trend in the economy. By bringing down CRR in 2011 and 2012, the enhanced cash flow has not reflected in higher investment. Although data on GDP, fixed capital formation, manufacturing share in GDP for Q2 and Q3 are not available, the general perception of slackness in investment continues. But one must look for other factors beyond interest rate to sensitise investment in the country.

The government had recently advised the PSUs to invest the surplus cash reserve amounting to more than R2,00,000 crore. The utilisation of surplus lands lying with PSUs is also being considered as one of the solutions to resolve partially the land issue for the industry. The brown field expansion by the steel industry is going to take care of the immediate supply constraints and may fill up the import needs in few categories. However, even this investment depends on multiple factors. For instance, in steel, if initial investment is for steelmaking (SAIL is shortly commissioning two blast furnaces), additional investment must be made for rolling mills which would require commensurate demand to realise the cost of investment. The consumption growth in the first six months of the current year at 5.4% is primarily contributed by an import growth exceeding 37%. Thus, additional capacities through higher volume of investment must be added in the country. This would require an enabling environment, a much speedier process of project clearances, firm policies on compensation and rehabilitation for the people whose lands would be needed for industrialisation. Thus, it is not the interest rates alone that would provide a solution to the low-growth syndrome.

There is another way of looking at RBI strategy of containing inflation by holding on the interest rate. To what extent this strategy had compromised the investment and growth prospects of Indian economy is debatable. But there is every possibility of commodity prices going up in coming months. Scrap prices have already started to move up taking in its stride the prices of billets and long products. Sponge iron production in the country is suffering for want of iron ore, which would lead to higher imports of costly scrap and also improve the quality of products. Unviable capacities and high cost producers with uncertain raw material linkages would find it difficult to carry on the operation. Flat producers in the advanced countries are already marketing at marginal cost prices and would be gradually forced to downgrade capacity utilisation. Thus, steel prices in the country are likely to move up in coming months irrespective of RBI strategies. Subsidies, if brought down, results in charging user prices. All these may further prompt RBI to rethink on interest rate.

The author is DG, Institute of Steel Growth and Development. The views expressed are personal