To cut inequity, help growth

First Rate Hike

By Shivaji Sarkar

The rate hike was a long-awaited decision. It was needed to check the rising prices, pep up the fledgling rupee, redirect the bank finances and help the country correct its course in a critical year. Further it will help senior citizens and depositors with higher interest accruals and hedge the banks. Plus, it can increase savings.
The rate rise has come after four long years and the first during the NDA regime. In the past, there were five rate cuts during Raghuram Rajan’s tenure — four of 25 bps and one of 50 bps and two both of 25 bps by Urijit Patel, the last in August 2017.
Those who are worried about increase in home and consumer loan rates have little to worry. Most banks, including the SBI, have already raised the lending rates and there is little scope to raise it further. The decision of the Monetary Policy Committee (MPC) to raise the interest rates by 25 basic points was unanimous stressing it was a dire need. The minimum interest rate has risen to 6.25 per cent.
The Government has reason to feel happy. Spiraling prices are never a good indicator as these hit the poor and are often said to be a tax on them. This apart, it affects everyone, be it businesses, industry or government functioning. The way the stock market has spurted after the rate hike is an indicator that the decision was appropriate. Plus, markets responded favourably too.
Most importantly it helps the banks. Had the rates not been low, perhaps the 2007-8 sub-prime crisis in the US-EU would not have taken place. Banks in India too would not have gone into over 80 per cent NPA or about Rs 12 lakh crore.
It must be remembered that higher interest rate helps banks. As Indian corporate post-2008 got easy loans, today these are having a tough time and many are taking a heavy hair cut. The rise – rather the practical rate – is always good for prudent economic functioning.
High rates also are likely to help the rupee gain strength, which has lost over 4.8 per cent. It would attract foreign capital, a lot of which has seen a flight in recent times. Perhaps more such steps and a stronger rupee would help India lower its import bill.
The Reserve Bank cited pressures from soaring crude and commodity prices. It estimates inflation to rise to 4.9 per cent, touching the RBI tolerance of 5 per cent. The Central bank retained a neutral stance, signalling it would be flexible in its response to challenges without stifling nascent economic recovery. So it maintained the cash reserve ratio at 6 per cent.
This raised the inflation forecast for the fiscal year amid core inflation remaining stubbornly firm despite the threat from food prices having eased. The RBI step is an indication that if the inflation does not sober down it might further raise the rates to keep the economy on track.
Inflation, for the monetary authorities inflicts a real cost on the economy as its major burden is borne by the poor, which eventually leads to distributional inequalities — social inequity. Also, persistently high inflation beyond a particular threshold level, could pose serious challenges to growth in the long-run.
This time round, the RBI has tried to make amends, as since August 2017 there had not been any rate tinkering despite pressures on prices and some slowing down, even though the GDP figures hovered around 7 per cent.
This is a signal for the government too to take steps to contain prices of many of its products and services. Each move of a government utility service impacts the price situation. Prices are needed to be contained also for the purpose of overall happiness of the people. Ancient economist Chanakya had said that if the people were happy so would be the king.
Of late, some government departments have strangely adopted a stance which is contrary to the stated position of the Government. It is logical that if price of commodities in the international market falls, the benefit should be passed on to the consumer. This is not happening in the case of either the petroleum products or gas. The RBI virtually has expressed its displeasure on the issue. Undeniably, there has been a marginal rise in the cost of Indian basket for oil, which has risen to $74. Coupled with retail rates it is not a happy state.
The RBI policy has indicated a correction for petroleum product and gas prices. While the Central bank has been less vocal on it, its disapproval is evident, as it hits the Government itself. Take the Ujjwala scheme for example. In the past three years, gas prices have risen to Rs 750 from Rs 350. This entails a cost on both the Government and beneficiaries despite the direct benefit transfer (DBT) or the subsidy paid to the four crore new families, who have got the connection.
Similarly, the MPC was eloquent on many other hikes, such as the railway fares being increased indirectly through the dynamic fare mechanism, higher platform ticket cost and denial of many concessions. Besides, the Government needs to take a call on many other services such as toll roads, various other tolls and levies.
The road cess on petrol continues apart from the high taxes and unnecessary hike of daily prices. This has hit transportation cost at every level and the consequent impact on prices, of many food items too. If the price of petroleum products is reduced, the benefits would be passed on to the consumer as after the GST, prices of many commodities were lowered despite levy at 28 per cent, one of the highest rates.
In particular, highway toll pricing is irrational and the National Highway Authority of India hasn’t been able to justify its annual 5 to 10 per cent hike. The reasoning of linking it to inflation is flimsy, as tolls certainly cannot be linked to inflation. Toll is levied to recover the construction cost. However, each year the balance gets reduced but profits of NHAI and it concessionaire simply soars.
So there are well-argued grounds for reducing tolls up to 75 per cent on most highways, which would mean much reduction on transportation cost and inflationary pressure. Why is the nation ignoring this? Further, despite adverse conditions, as the RBI notes economic activity has shown sustained revival and the latest CSO figures indicate last quarter growth of 2017-18 at 7.7 per cent. With favourable pricing growth can further accelerate. Why the delay?—INFA