Reserve Bank Deputy Governor K C Chakrabarty today sought to stave off criticism that the nine-year low GDP growth was primarily due to the 20-month high interest rate regime,saying it was driven by a host of other factors.
“I don’t think that the interest rates are that high,or our policy rates are that high that should significantly affect growth. Growth is being affected for a variety of reasons. We are overplaying the interest rate aspect (for low growth). It may be one of the reasons,” KC Chakrabarty told the Skoch summit here.
Buttressing his point further he said,”I don’t know how much growth sacrifice is due to lack of productivity,lack of efficiency,and how much is it due to inflation.”
At 6.5 percent,the economy slumped to the lowest rate in the past nine years in FY12,and many have blamed the Reserve Bank’s tight monetary policy,coupled with the policy paralysis and lack of strong political will at the Centre as the reasons for the poor show.
Between March 2010 and October 2011,the RBI ramped up its key lending rates by a whopping 375 basis points in a 13 uninterrupted rate hikes cyle to batten down inflation which was near double-digits. But ironically,price index still hovers near 8 percent,while growth has plunged,inviting criticism from many quarters,especially the industry.
However,Chakrabarty admitted that interest rates do affect growth,saying “what we are saying why interest rates affect growth is because inflation affects growth. If inflation comes down,interest rate will also come down. But to say that growth is only going (down) because of high interest rates is a little bit exaggeration and we must look into that.”
“If inflation comes down,definitely monetary policy rate will come down,” he said,adding that “for the Reserve Bank,the first priority is inflation. It is not only growth,we have a multiple indicator approach. But,inflation is definitely the major concerns.”
Arguing that even a 2 percent drop in interest rates by the EBI will not majorly help bring down cost for corporates,he said,”6-7 percent of overall cost for a any company is the interest cost. Even by reducing interest by 2 percent,their cost is not going to be impacted.”
Countering the view that low GDP growth was driven by low investment growth,he said the GDP growth in fact came off the 2002-08 highs due to poor manufacturing growth.
“Our manufacturing growth used to be at one stage 8-9 percent. That means we have a capacity of 8-9 percent. Now it is only 2-3 percent. If so,where is the question of additional investment? Immediately you can ramp up manufacturing growth,as there is an output gap,” the Deputy Governor said.
On the impact on global economy with a possible exit by Greece from the Eurozone,he said,”It will have some impact,adverse impact that is all I can say,” adding that if there is any problem arising from this,then the government and RBI will switch to their contingency plan.
FinMin pleads for RBI rate cut
On Thursday,pitching for cut in interest rates by the RBI in its forthcoming monetary review,the finance ministry said low interest rate regime would push growth rate,which slipped to nine-year low of 6.5 per cent in 2011-12.
“We see a possibility of growth picking up,if interest rates are reasonable,” Department of Economic Affairs Secretary R Gopalan told reporters when asked about government’s views on the interest rate scenario.
He said the Reserve Bank would take into account the inflationary situation and external factors while deciding on the interest rate stance in its policy review on June 18.
While the wholesale price (WPI) inflation in April was 7.23 per cent,consumer price inflation based on retail prices was 10.36 per cent.
Gopalan said the growth prospects of the economy are improving on the back of falling crude oil prices and gold imports. These two factors would help bring down current account deficit (CAD). Besides,savings rate in the January-March quarter has shown improvement.
After growing at 8.4 per cent in two consecutive fiscals,the economic growth rate fell to 6.5 per cent in 2011-12 mainly on the back of lower manufacturing sector output.
The government expects the economy to grow at 7.6 per cent in the current fiscal.
Gopalan said the government has to address issues of fiscal deficit and CAD for economic growth.
“The government has to address deficit issues if it wants growth to take place. So fiscal deficit has to be kept at 5.1 per cent in this fiscal,” he added.
The fiscal deficit was 5.76 per cent of the GDP in 2011-12,while the CAD is estimated at around 4 per cent.
On Rupee,the secretary said,the nervousness in the eurozone and the crude oil prices had resulted in lowering of the value of the domestic currency.
The Rupee has declined over 20 per cent since January.
The Rupee was trading at around 55 against a dollar in today’s market.
“I feel the external situation may not deteriorate and with the kind of steps we take,we are seeing that the Rupee will not remain at this level,” he hoped.