Thirsting for money, starved for capita

“I don’t think the government or the RBI can kick-start the economy with such policies. We need bold measures to reversethe economic slowdown, boost savings rate, capital market and push up exports,” said a leading businessman, adding, “the latest credit policy will be remembered for the measures that the RBI has not taken.” This is after the RBI Governor acknowledged that “the slowdown in industrial growth witnessed in the first half of 1997-98 has turned out to be more persistent and widespread than expected.”

Had the RBI been willing, the timing was perfect for some bold measures. The inflation rate was below five per cent, foreign exchange reserves are at a comfortable level of $ 29.4 billion, money supply growth was at 17 per cent and the rupee-dollar level was steady at Rs 39.71. However, the central bank preferred to be cautious, forcing CII to come with a statement saying that the conservative credit policy would restrict resources for financing investment, expansion, modernisation and growth.

Jalan had gone on record saying that “henceforth greater importance would be accorded to structural changes in thecredit and monetary policy statements” while short-term measures such as changes in the Bank Rate, cash reserve ratio, repo rates and access to refinance will be subject to change at short notices. Agreeing to this view, experts said the RBI should not overlook the needs of major segments like agriculture and infrastructure.

Agriculture is still contributing nearly 25 per cent of the GDP (gross domestic products), but the central bank has not done much to improve credit delivery among farmers, especially in poor villages. This is even after the R V Gupta Committee had recommended several far-reaching proposals like replacing subsidy-linked farm loans with alternative method, powers to bank branches to clear 90 per cent of the loan applications, abolition of stamp duty on mortgage land and extending a composite cash credit limit as agricultural credit. If implemented, such measures would have bucked up the spirit of farmers hit by crop failures and vagaries of weather. The small scale sector which is alsocontributes substantially to the economy was also neglected by the new governor.

The second major segment overlooked by the RBI is infrastructure. In the words of R K Pitamber, president, Bombay Chamber of Commerce and Industry, “there is nothing in the policy to encourage infrastructure financing, which is a critical input for boosting investments and reviving the economy.” This has happened at a time when major infrastructure projects in power, telecom and transport are hit by fund shortage and high interest rates. As such projects involve long gestation periods, long-term returns and huge investments, the government and the RBI need to formulate suitable packages.

This assumes importance against the background of the poor track-record in completion of power projects and funding of telecom ventures. One way to release bank funds for infrastructure projects would be by lifting the CRR and statutory liquidity ratio (SLR) — funds retained with the RBI and invested in securities respectively — onlong-term deposits.

The role of the capital market was also ignored. Brokers are upset with the fact that the central bank has not taken any policy initiative to bring back small investors or revive the fortunes of the sagging market morale. The market was pinning its hopes on a cut in cash reserve ratio (which will release more funds into the banking system), badla finance by banks and hike in ceiling on loans against shares/debentures. Badla finance is a tricky business and needs a close study before allowing bank funding. Although the RBI had hiked the ceiling on loans taken against shares dematerialised through a depository, it doesn’t mean much for investors in many corners of the country who are yet to understand the concept of depositories and dematerialisation.

If the RBI had allowed banks to finance badla (interest rate on carry-forward transactions) with a set of guidelines and removed the limit on lending to brokers, the market sentiment would have got a big boost. Similarly, the RBI has notremoved confusion regarding funding of takeovers. After the SEBI’s new takeover code, mergers and acquisitions have increased but confusion still persists over whether banks can directly finance takeovers. There was a widespread expectation that RBI will come out with clear guidelines on funding of takeovers, but it was belied. This will surely have an impact on corporate restructuring and takeovers.

In the case of exporters, what the RBI has done is to roll back the measure i.e. 100 per cent export credit refinance and one per cent interest rate reduction in pre-shipment export credit. For exporters hit by the sharp fall in South-east Asian currencies and low interest rates prevailing in other countries, these measures are certainly not enough. “This is not enough to boost sagging exports,” says Ramu Deora, president, Federation of Indian Export Organisations (FIEO).

In the last several credit policies announced by the former governor C. Rangarajan, interest rate and cash reserve requirements werereduced at least four times without any corresponding growth in the level of investment in the country as is reflected in the poor credit offtake from banks and institutions. “The experience of South-east Asian countries show that the domestic saving rate should be encouraged to increase capital formation in the economy. If the country depends too much on foreign capital, the long-term impact will be dangerous,” said an economist.

As a businessman put it, there should be bold measures to meet the need of the time. The capital market, exporters, several segments of the industry and the farm sector are crying for attention. They want interest rates to come down and stock markets to improve. Now much will depend on the proposals in the forthcoming Union budget.