The RBI Governor, Dr D. Subbarao, kicked up a storm the other day when he sought to give a different slant to the relationship between interest rates and growth by pointing out that interest costs account for just 3 per cent of corporate revenues.

As a matter of fact, said one analyst, operating results for April-June put interest payouts at more than 11 per cent of total revenues. Fair enough, says Dr Subbarao in a recent rejoinder, but in the very same sample of companies the figure is just 2.7 per cent for non-financial firms. And in any case, real interest rates today, even after the hikes, are lower than what they were during the 2003-2008 boom. So what’s really happening here?

Best guess?

Interest rates do impact growth, but so do many other things. Best guess? The persistent supply-side inflation which has been unleashed as a result of too much welfare money chasing too few welfare goods; the huge fiscal deficit with which we are approaching in the last lap of the election cycle; sluggish exports and capital flows; the grave doubts about policy predictability created by Mr A. Raja’s handling of telecom licensing — and by Dr Manmohan Singh’s attempt to tar all telcos with the same brush after the Supreme Court cancelled the licences given by Mr Raja; the attempt to retrospectively and prospectively squeeze foreign investors to garner more revenues for ‘inclusive growth’; and the blow-hot-blow-cold on the taxation of FII’s capital gains, which could have led foreign capital to resort to a sort of calibrated ‘strike’, as a negotiating tactic.

This does not mean that the RBI does not intend to cut rates later this month. It only means that, even if it does, there will be no sudden pick-up in growth. The Sensex will move up, but gravity will soon reassert itself.

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