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RBI rate cut seen giving little boost to economy

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India will have to do much more than tinker with monetary policy to revive a flagging economy headed for a third straight year of slower growth, analysts say.

"The government needs to get cracking on reforms and infrastructure," M R Madhavan, head of research at Bank of America, told Reuters on Tuesday, a day after the central bank cut the key interest rate to its lowest level in 28 years.

"Reviving growth is not just a monetary issue. The key for the government is to get its act together," he said.

Analysts say the problems dogging the economy, one of the world's fastest growing over the past decade, are deep-rooted and go beyond just the cost of funds for business.

The government needs to cut taxes, step up spending, particularly on creaking infrastructure, and boost business confidence by pushing tough economic reforms.

"So far this year, we have not seen much evidence of their taking up any legislation seriously," Madhavan said.

India's central bank on Monday cut the key interest rate by half a percentage point to 6.5 per cent, and signalled it was ready to loosen liquidity by slashing cash reserve ratio requirements by 200 basis points to 5.5 per cent in two stages.

This will release deposits of up to Rs 80 billion kept with the central bank by commercial banks.

These measures will result in improved supply of funds and could spark a slight drop in bank lending rates, analysts said, but added the government must take the lead to spur demand and investment.

Since unveiling a widely acclaimed budget at the end of February, the government has spend much of its time fighting off allegations of corruption and mismanagement.

That has stalled crucial legislation, which includes power sector and labour reforms and, more critically, a bill to set a statutory cap on the fiscal deficit.

NOT SENSITIVE

The economy has not been responsive to interest rate movements in the past -- while prime lending rates of leading banks have come down by 100-125 basis points over the past two years, economic growth slowed to 5.2 per cent in 2000-01 from 6.4 per cent a year earlier.

"Traditionally, investment demand in India has not responded much to interest rate movements so I do not see much impact from yesterday's cut," said Pradeep Srivastava, chief economist for macroeconomic policy at the National Council for Applied Economic Research.

"There does not seem to be scope for an immediate pickup in business confidence which could boost investment demand," he said.

Srivastava said business confidence was down due to general gloom about the outlook for global and domestic economies and fears over the threats from increasing imports as trade restrictions are steadily lifted.

"Businessmen will only invest if they think that there may be some pick up in demand in the future, there is no such feeling now," he said.

The RBI in its policy review scaled down its expectation for 2001-02 GDP growth to 5.0-6.0 per cent from an earlier estimate of 6.0-6.5 per cent.

India's GDP grew 5.2 per cent in the year ended March 2001, slowing from a rate of 6.4 per cent a year earlier.

While these numbers are impressive, given global trends, they are not enough to dent poverty levels in a country of more than a billion people.

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