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Economy disinterest

ON ANY SCALE of earnestness to battle a slowdown, the US is surely scoring more points than India with Washington unveiling huge tax cuts to back Fed's easing of interest rates. The Finance Ministry and the RBI have responded with windy meetings, with th e next scheduled for July 13. The US Fed rate today is 3.75 per cent and the maestro, Mr. Allan Greenspan, is not averse to further cuts if need be though he may not be explicit. On Mint Street, officials are analysing data to get at a possible co-relati on between growth and low interest rates as the last Bank Rate cut followed by banks dropping their prime lending rates did not help activate capital investment.

The economy has slipped, with the latest GDP growth estimates for 2000-01 being just 5.2 per cent against the earlier forecast 6 per cent. Till recently officials were taking pride in a 6 per cent GDP growth when other economies were moving at a slower p ace, but this is no consolation as India is still quite far from being a developed economic power. The Finance Minister, Mr. Yashwant Sinha, has been talking of marking up public investment to nurse demand and that can happen only if infrastructure polic ies are more specific. In one of its reports, the RBI has admitted to ``halting recovery of aggregate demand'' pulling down GDP growth and now all bets, as in earlier years, are on a good monsoon. But this may not happen with the corporate world trying t o shrink activity and agriculture devoid of private and public capital investment for the last few years. The country raised nearly $10 billion in high-cost loans from the international market in the last few years to place in infrastructure projects onl y to find the rupee funds going into government food stocks. Can public or private investment bloom when power to the farm sector is free or heavily subsidised, or new road projects have problems collecting toll from users? Bankers have lost the enthusia sm for funding capital-intensive projects being unsure of returns and are today talking of going retail. But this can only take them a small distance as there are too many players offering identical interest rates on housing and other consumer loans. Pri vately, bankers are averse to cutting the prime lending and deposit rates, not used to working on low spreads forced by a low-interest regime.

The dip in the interest rates in the money market has helped government borrow cheaper and corporates replace high-cost debt with lower-cost borrowings. To cut oneself free of weedy undergrowth, the RBI can think of pruning the Bank Rate again, to six pe r cent, and get the banks lower their prime lending and deposit rates. But there are limits to this exercise as any deep cuts in deposit rates can start yielding negative returns. The Budgetary exercise trimming interest rates on contractual savings has hit pensioners with all other avenues to invest funds drying up. Yet, if one is banking on the RBI to come up with a rate cut it is because there seems little faith in New Delhi surfacing with a viable economic agenda.