Business Economics & Services Team (BEST)
Confusing Economic Signals Thwart Development Process
The other day, we heard that the index of industrial production registered the lowest ever growth of 4.2%- lowest ever in the last three years or so - riding on the slow pick up of the manufacturing, particularly capital goods sector. Today, we hear that the economic outlook is not as gloomy as it is projected. Despite the slow industrial growth, credit to industry has grown by 11.3% by the end of November as compared to the same period in the last year. If we have to believe the figure released by RBI, the industrial growth is showing signs of good pick up.
The rating agency - CRISIL- also has come out with a positive outlook on the economy. Bereft of the figures that it has doled out to substantiate its hypothesis, there is a massive pick up of implementation of the projects cleared in 2013-14. Majority of the projects, which were struck in policy paralysis have started rolling out. Not only that. The projects cleared by the new government, which assumed office in May this year, are being implemented on a fast -track.
What does it mean? Is the all round clamor by industry for a rate cut based on lack of pick up of the economy is wide off the mark or the cry of the industry is checkmated by selective leaks from the RBI to prove the point that all that is made out by industry and trade is bordering a Oliver Twist syndrome: more you give more they want? It seems newspapers also have changed the tracks. Finacail papers which have argued for rate cuts through their carefully planned plants and industry specific stories campaigning for a rate cut have now taken u -turn in their stand and now are publishing stories and edits that support the RBI governor. Does it mean that RBI governor has won the game, discounting even the veiled suggestion of the finance minister for a rate cut?
The most unfortunate part in the entire episode is the role played by the banks-both public and private ones. In order to lend credence to the pro-interest rate lobby's demand for a rate cut, on their own, they have brought down the deposit rates arbitrarily. While do so, they said that they are making an enabling situation for the RBI to go for a rate cut. Why the cut on deposit rate? That is possibly the easiest thing that they can do without getting any sanction from any source. Should RBI call for an explanation from these banks what prompted them to go for a rate cut? The primary objective of the bank nationalization back in 1971 was to salvage the banks from the clutches of vested interests, who decided what to be done and what not to be done. The overriding principle of nationalization was to commit the resources of the country to larger interests of the nation. Is that purpose served? Do the banks carry out due diligence before taking such steps like deposit rate reduction or play to the gallery? These are some of the issues that have to be introspected to ensure transparency in bank functioning.
Industry also will have to introspect on what they should ask for. It is high time that they work out a correlation between rate cuts and industrial pick-ups. Also, rate cuts and easy land acquisitions alone will not bring about industrial pick up. They have to assume a more responsible role that when they get the scarce resources from institutional sources, they should realize that they are playing with the peoples' money and should be accountable for omissions and commissions committed on that. The scarce resource should be put to use in the most prudent manner.
It is also important that the brick and mortar industry has to de-link from their past and try to emulate some of the knowledge based industries. This segment has come up on its own and not by availing loans and equities from the institutional sources. Even if they have taken loans, their repayment rate is strikingly good. They have also created millions of employments in the country and a lot of millionaires, who have become their stakeholders either as employees or shareholders. People have reposed faith in them and the same thing cannot be said about the brick and mortar industries.
