Rate Rise To Boost Savings
By Shivaji Sarkar
The world economy is in turmoil as crude touches a high (since 2014) in the wake of US rejection of the Iran nuclear deal. The Rupee is on a roll to touch one of the lowest marks against a surging dollar, a phenomenon that occurs for the eleventh time since 1983.
Undeniably, inflation is set to rise in India. The good news? As interest rate rises it would cause cheer to depositors and the banking sector. This will boost savings which has touched a low of 29% growth in 2016 from a peak of 38.3% in 2007, just before the Lehman Brothers crisis ruined the banking sector. Malaysia and Pakistan have already started gradual increases in interest rates.
Remember, the rupee had touched Rs 58.96 against the dollar in May 2014 soon after the NDA Government took over and now it has gone to a low of Rs 67.43 and is projected to fall further. This poses a politico-economic problem as twin rises – oil and dollar – disturbs businesses and Government and leads to an inflationary situation, trouble for international commerce, trade balance, budgetary projections and possible inequalities.
Pertinently, all this is happening at a time when the UN’s Economic and Social Survey of Asia and Pacific 2018 (ESCAP), launched in Delhi and International Monetary Fund’s (IMF) latest economic outlook, project low regional and world growth necessitating economic reorientation.
Undoubtedly, world bodies are worried at the US attitude and economic roil. India is seeing a currency crisis that had last hit it in September 2013, when the rupee had touched almost Rs 68 to a dollar.
Certainly, this not only makes crude more expensive for an Indian but also hits home budgets and might lead to a farm crisis as input costs, particularly irrigation, fertiliser and transport are bound to rise. Consequently, there might be problems for growth, job creation and development funding. Wage rise and many readjustments are a must.
Significantly, the IMF has just projected India growth at 7.4% up from 6.7% in 2018 though advanced economies including the US would have almost 0.2% rise in 2018 at 2.9% and in 2019 at 2.7%. The Euro zone will grow 2.4% this year before falling to 2% in 2019.
The ESCAP projection is 0.4% growth for Asia-Pacific, having 53 States with 60% of the world population, at 5.8% in 2017 against 5.4% in 2016. India and China lead the growth and the Russian Federation which having come out of recession on oil price recovery might add to the cushion.
However, this year growth in Asia-Pacific is set to fall to 5.5% as in half the countries consumption of the bottom 40% grows at a slower pace. As real wages are not rising by rising productivity, consumption would be led with debt and cause financial vulnerabilities.
Social inequalities are also set to rise with higher inflation as economies would be operating below their potential, hit by low wage and job growth. Though e-commerce might meet demand at lower costs, automation may further lower wages. The working classes in the region are in for big trouble. Whereby, it might be an uphill task to contain social discontent.
Further, trade barriers and harsh US measures are likely to further disrupt cross-border production networks. This may affect not only trade but also long-term investments. Even short-term investments like withdrawals by foreign portfolio investors from the Indian market might cause foreign exchange problems to be further fueled by rising import bills for crude and other goods. Obversely, exports rises would be moderate and are unlikely to offset the foreign exchange.
Significantly, a repeat of the 1997-98 Asian financial crisis is forecast. It might have an adverse impact on India’s Look East Policy as countries like Malaysia, Thailand, South Korea and China face financial vulnerability in the wake of rising private debt resulting in asset price corrections, says ESCAP. It might also impact projected Indian investments in building roads in Myanmar and South-East Asia.
According to ESCAP India was hedged as commercial lending rates were not lowered because of banking sector problems. Hence, rising deposit rates would not be much of a problem for Indian businesses and would help individual savers.
While ESCAP has stressed on further tax widening and increases, it has not stated how rising taxes add to citizen’s woes as it is inflationary and increases Government expenditures. This leads to a concern of povertisation of the transitional, middle, class, says Jaimini Bhagwati, RBI professor, ICRIER and former Finance Ministry Joint Secretary. Adds ESCAP South and South-West Asia Head Rupa Chanda, the tax increase measurers also leads to problem of attitudes (tax-terror) of tax officers.
Notably, if the Government wants deposits, which had fallen because of lowering of interest rates and taxing individual banks deposits to rise, improve health of the banking sector it has to amend its policies and let the deposits not be subjected to TDS.
This will boost banks, economy and reduce the Government’s burden on avoidable costs, processes, and litigation. Since the introduction of TDS on bank deposits, reviews and litigation have increased. If this is done away with individual and bank liquidity is set to rise and Government finances are bound to improve with higher consumption, tax realization and better ease of doing business.
Similarly, many unnecessary recently introduced banking procedures also have to be simplified. For a few rogues, all bank clients should not be punished. Tax procedures and banking should create a friendly approach to the Government in the run up to the 2019 polls.
The ESCAP also suggests ‘macro-prudential’ measures to do away with financial (tax) excess. These, it says, reduce systemic risks and safeguard stability of financial (banking and revenue) system and markets. It sees problem in India’s Rs 9.5 trillion NPAs caused by corporate leverage. Its oblique suggestion is not to hit the ‘micro’ individuals — citizens of institutions.
Another aspect that has to be taken care of is the surging deficits of various State Governments. The Centre’s deficit, it finds, is controlled and overall debt is one of the lowest at 60% compared to Japan’s of above 20%.
In sum, it finds strengths in the Indian economy but calls for fine-tuning to make the trajectory smoother and faster. The international situation — oil prices and dollar — would remain a problem but with some ease of methods and trust in citizens, India can remain the engine of world growth. —– INFA