With due interest

There has been abundant criticism of the government8217;s announcement of the Rs 60,000 crore debt write-off for farmers. As our columnist today argues, the measure would primarily benefit banks encumbered with loans they may not have recovered anyway. It has, in addition, sent out a message that loans can be taken with at least half a hope that they may not have to be repaid. The modalities aside, however, one thing is clear from this post-Budget discourse. It acknowledges that there are a great number of Indians with loans that are difficult to pay; and that there are even more people wanting access to cheap credit. The jury may be still out on the efficacy of Finance Minister P. Chidambaram8217;s measure for farmers, but his follow-up observation this week that there is scope for interest rates to be brought down will plant hope in rural and urban areas.

It has been just about a month since the Congress even took notice of the increasing burdens of the Indian on easy monthly installments EMIs, and asked for relief, especially for those on home loans. As it should have. For two years now the government has been so blind-sided by the prospect of inflation that it has presided over a monetary framework that has been pushing up interest rates. Consider the effect of this. If that everyman, the aam aadmi, had borrowed Rs 5 lakh at 7.5 per cent in 2005, he may have settled for the prospect of paying EMIs of Rs 4000 for 20 years. At 9 per cent, he would be paying those EMIs for 27 years. At 10 per cent he would be dishing out those sums for 70 years. A month ago the rate was 11 per cent. Besides increasing financial stress on EMI-paying households, high interest rates have also reduced opportunities for aspiring loan-takers. In a year of important state elections, if not a general election too, the political constituency created by EMIs could be important.

Budget 2008 has many measures to help households retain more disposable income. This would remain an incomplete exercise if the absurdly high interest rates are not brought down. The finance minister8217;s observation sends out the right message. But banks need an unambiguous signal from the Reserve Bank of India to gain confidence to cut rates rationally.