High interest rates hitting growth: FM

Written by Sunny Verma | New Delhi | Updated: Mar 19 2012, 06:13am hrs
Having clarified its intent towards fiscal consolidation in the Budget, the government is now hoping for the Reserve Bank of India (RBI) to cut interest rates which would boost industrial growth and lower the borrowing costs of the Exchequer.

Finance minister Pranab Mukherjee on Saturday agreed that high interest rates were now adversely affecting economic growth, particularly the manufacturing sector. I do agree it has affected, Mukherjee said while responding to FE query on whether high interest rates are now hampering growth beyond acceptable level.

Economy is projected to grow at 6.9% this fiscal and 7.6% in the next.

I am fully confident that the RBI will take action at the appropriate time and we are in touch, Mukherjee said, speaking to financial newspapers. Manufacturing growth tumbled to 0.4% in the December, when GDP grew only 6.1%.

As a stop-gap arrangement for cheap credit, the government in the Budget announced access to external commercial borrowings and lowered withholding tax for sectors including power, aviation and low-cost housing.

The finance minister said these were temporary arrangements, which will be withdrawn once the domestic interest rate scenario becomes more benign. Overseas loans are at least 400 basis points cheaper than domestic credit, even after including the hedging costs.

I cannot give cheap funds to the corporate sector, therefore, I am allowing them access to cheap funds abroad. But when the domestic availability of funds will be cheaper they will not go for that. It is as simple as that, Mukherjee said.

With Mukherjee spending R3.19 lakh crore on interest payment next fiscal, officials pointed out the need for lower interest rates. The government has pegged gross borrowings for 2012-13 at highest-ever R5.7 lakh crore, up from the already bloated figure of R5.46 crore in 2011-12.

Officials said the Budget commitment in capping the subsidies bill at 2% of the GDP in the next fiscal should be seen as a clear intent towards fiscal consolidation. The RBI has criticised the government for running a high fiscal deficit, which is projected at 5.9% in 2011-12, much higher than the 4.6% Budget estimate. Bond markets tanked immediately after this number was announced. High oil prices and suppressed inflationary pressures in the economy are among reasons holding back the RBI from lowering rates.

Rajeev Malhotra, economic adviser to the finance minister, was confident that the RBI would cut interest rates soon.

You also have to keep in mind that perhaps we are at the end of the rising interest rate cycle. Inflation has moderated and is expected to moderate a little more and stabilise for the rest of the year, he said.