Macro Economy

Cut interest rates, keep up reform momentum

Tomojit Basu New Delhi | Updated on November 05, 2014

The economy gathering pace marks an admirable beginning to the BJP-led government but economic reforms must be sustained and interest rates should be cut to keep India charting an upward trend on the growth path. This was the sentiment uniting panellists at a session of the World Economic Forum’s (WEF) India Economic Summit, co-organised with the Confederation of Indian Industry (CII), here on Wednesday.

Titled 'India Growth Outlook', the session dealt with pressing issues such as the fiscal deficit, food price inflation and regulatory reforms. The speakers included Mahindra & Mahindra Chairman and Managing Director Anand Mahindra, CII President Ajay Shriram, Harvard Economics professor Gita Gopinath and William Danvers, Deputy Secretary General of the Organisation for Economic Cooperation and Development (OECD).

“You can’t do big bang reforms, there is a need for steady consistent ones. It’s like cleaning the pipelines which were clogged despite inheriting a good system from the British,” said Mahindra, adding that it was small businesses that require and most benefit from the implementation of reforms.

Danvers believed that there was a need for clarity on the question of reforms for investors and Indian citizens. “There needs to be a holistic reform agenda in India and better articulation is needed to be provided on the question of policy to the electorate. The Government, because of its large mandate, also needs to be careful about not committing to unrealistic expectations as has happened earlier,” he said.

In favour of a rate cut

Panellists felt that an environment has been created for the Reserve Bank of India (RBI) to push forward rate cuts to help industry expand against the favourable backdrop of decreasing commodity prices globally and inflation.

“It’s a matter of prudence, the RBI has done well to contain inflation using a high interest rate. In my opinion, the environment for rate cuts has emerged, particularly with regard to world oil prices decreasing and the deregulation of diesel prices here. There has also been talk of divestments which I feel would benefit growth. The rupee has stabilized and supply side pressures have been eased,” said Gopinath.  

In response to the economy growing and consequently demand increasing, Gopinath expected a hike in interest rates by the United States’ Federal Reserve. “I think the Fed will increase interest rates gradually in response to the US economy picking up. The increasing demand would be great for India,” she said, adding that the efficacy of policy would only be reflected in the rate of investment improving in the country.

Mahindra stated that with inflation decreasing, it was time for the RBI to consider a rate cute. “The need of the hour has changed and it is to start looking at ways to support growth and improve market sentiment,” he said.

Inflation according to the Wholesale Price Index (WPI) hit 2.38 per cent in September, a five-year low, while retail inflation dropped to 6.46 per cent.  

Published on November 05, 2014

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