Reserve Bank of India (RBI) Deputy Governor K. C. Chakrabarty, on Friday, sought to stave off criticism that the nine-year low GDP (gross domestic product) growth was primarily due to high interest rate regime, saying it was driven by a host of other factors.
“I don't think that the interest rates are that high, or our policy rates are that high that should significantly affect growth. Growth is being affected for a variety of reasons. We are overplaying the interest rate aspect (for low growth). It may be one of the reasons,” Mr. Chakrabarty told the SKOCH summit here.
Buttressing his point further, he said, “I don't know how much growth sacrifice is due to lack of productivity, lack of efficiency, and how much is it due to inflation.”
At 6.5 per cent, the economy slumped to the lowest rate in the past nine years in 2011-12, and many have blamed the Reserve Bank's tight monetary policy, coupled with perceived policy paralysis.
Between March 2010 and October 2011, the RBI ramped up its key lending rates by a steep 375 basis points in a 13 uninterrupted rate hike cycle to batten down inflation which was near double-digits. But ironically, price index still hovers near 8 per cent, while growth has plunged, inviting criticism from many quarters, especially the industry.
However, Mr. Chakrabarty admitted that interest rates do affect growth, saying “what we are saying why interest rates affect growth is because inflation affects growth. If inflation comes down, interest rate will also come down. But to say that growth is only going (down) because of high interest rates is a little bit exaggeration and we must look into that.”
“If inflation comes down, definitely monetary policy rate will come down,” he said, adding that “for the Reserve Bank, the first priority is inflation. It is not only growth, we have a multiple indicator approach. But, inflation is definitely the major concern.”
Arguing that even a 2 per cent drop in interest rates by the RBI would not majorly help bring down cost for corporates, he said, “6-7 per cent of overall cost for any company is the interest cost. Even by reducing interest by 2 per cent, their cost is not going to be impacted.” Countering the view that low GDP growth was driven by low investment growth, he said the GDP growth, in fact, came off the 2002-08 highs due to poor manufacturing growth.
“Our manufacturing growth used to be at one stage 8-9 per cent. That means we have a capacity of 8-9 per cent. Now it is only 2-3 per cent. If so, where is the question of additional investment? Immediately you can ramp up manufacturing growth, as there is an output gap,” Mr. Chakrabarty said.
Contingency plans
The RBI and the Government has contingency plans to deal with the situation if Greece exits the Eurozone, Mr. Chakrabarty said. “It (Greece exiting the Eurozone) will have some impact, adverse impact that is all I can say,” he said, adding that if there was any problem arising from this, the government and the RBI would switch to their contingency plans. However, he did not disclose the details of any such plan.
The Indian economy has already come under pressure from global economic slowdown and the Eurozone crisis, leaving a bruising impact on the rupee which has depreciated by about 20 per cent in the last one year. After a modest recovery in the last few days, rupee again lost ground declining by 48 paise to 55.42 against the dollar.
The Eurozone crisis has also impacted capital inflows into the Indian stock market as the global investors are shuffling their portfolios looking for safer havens like dollar and gold. If Greece exits Eurozone, demand for dollar may go up and there could be other debt problems.
