The Hindu Business Line : Chambers pitch for lower rate regime

New Delhi, Oct. 7 With the mid-term review of Monetary Policy 2007-08 round the corner, the industry has made a collective request for lower interest rate. Industry chamber FICCI has urged the Reserve Bank of India to unveil a softer interest rate regime to spur credit growth.

For its suggestions to the RBI for the Annual Policy statement, FICCI conducted a quick review of some important sectors where credit need is significant and requires special attention of the regulator.

The FICCI survey points to the need for ‘direct agriculture’ lending for investments in agri-marketing infrastructure by corporates in sectors such as construction of warehouses and cold chain transportation without any upper ceiling. This would make more funds available for activities that build the agricultural value chain since banks have a large corpus of funds available to lend under the ‘direct finance’ category of priority sector lending.

Specifically, the survey recommends that the ‘direct finance’ category for agriculture should be expanded to include investments in infrastructure for the entire agri value chain. The bank finance for all investments should also be included as part of ‘indirect finance’ category under priority sector guidelines in areas such as extension services provided by the private sector to the farmer, setting up of bio-fuel extraction facilities, research on development of alternate feedstocks and establishing large bio-fuel plantations, micro irrigation, and e-governance and digitisation.

In its recommendations, the Confederation of Indian Industry has expressed concern over high interest rates affecting investments and growth and said that the time is right to recognise the need to reduce interest rates, which is pivotal to sustain GDP growth of over nine per cent.

With inflation at less than the lower limit of RBI’s tolerance levels of 4-4.5 per cent in the medium term and given the strong macro economic conditions, it is time to review the tight monetary policy regime, according to the chamber.

However, bank credit has declined from a high of about 33 per cent in June 2006 to about 23 per cent in August 2007. The RBI’s efforts to manage liquidity seemed to have worked but the index of industrial production growth declined in July 2007 to 7.1 per cent from 13.2 per cent in July 2006.

A CEOs’ snap poll conducted by the chamber revealed that high interest rates are a cause for concern and a majority of the CEOs feel that the interest rates should be reduced to encourage more investment. The poll revealed that 69 per cent of the CEOs expected the rates to be lowered to about 12 per cent (PLR) from the current level of 13.25 per cent.

The country would need investment rates in excess of 36 per cent of GDP to achieve 10 per cent GDP growth in the medium term, which is important to increase per capita income and reduce income inequalities.

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