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Rate cut not enough to boost ailing economy

Surojit Gupta in New Delhi

Indian business groups and analysts said on Wednesday a cut in the nation's benchmark interest rate to a 29-year low would not be enough to jumpstart the stumbling economy and major economic reforms were needed.

The Reserve Bank of India reduced on Tuesday its leading rate by a quarter point to 6.25 per cent, lowered its repurchase or market borrowing rate to 5.5 per cent from 5.75 per cent and cut bank reserve requirements to 4.75 per cent from 5.0 per cent.

The central bank's triple easing was aimed at buttressing Asia's third-largest economy hit by the worst drought in 15 years and sluggish industrial activity.

"We don't see the cut unleashing animal spirits in terms of reviving industry or increasing capital spending," Jayant Bhuyan, secretary general of the Associated Chambers of Commerce and Industry, told Reuters.

Business groups were doubtful whether commercial banks would pass on the rate cuts to industry, due to rigid banking practices and fears about bad loans.

Economists and business groups said the government must move fast on such issues as privatisation, deregulation and changes to strict labour laws for the economy to pick up significantly.

But pessimism about the economy did not spill over into the debt market. "Sentiment is still very bullish as the policy exceeded expectations," a primary dealer said.

The key Bombay share index was flat and traders said it would take time for the easing to filter through to stocks.

Reserve Bank of India Governor Bimal Jalan fuelled the upbeat debt market mood on Wednesday when he said more changes could be made to the repurchase rate, depending on liquidity.

He reiterated "the overall stance of monetary policy is soft, especially after the monsoons" but said the bank rate would remain stable for the next six months.

The bank has room to cuts with the inflation outlook benign.

On Tuesday, the central bank estimated farm output would fall 1.5 per cent in the year to March 2003 due to poor monsoon rains. Some 70 per cent of India's more than one billion people live off the land, making rural demand a key economic growth driver.

The bank also cut its 2002-03 overall growth estimate to 5.0 to 5.5 per cent from 6.0-6.5 per cent forecast earlier, citing the monsoon's impact. Farm output grew 5.7 per cent in the year to March 2002 and the overall economy expanded by 5.4 per cent.

Economists cautious

While the finance ministry called the bank's GDP estimate "quite realistic", private economists were more cautious about the outlook for India's economy.

Pradeep Srivastava, economist at the National Council of Applied Economic Research, forecast growth at 4.5 to 5.0 per cent in 2002-03 -- well below the government's eight per cent goal set for the next five years, the minimum seen required to make a dent endemic poverty.

"The eight per cent growth target is symbolic. I don't think anyone believes in that," he said. "For achieving growth, the key element is reform," Srivastava said. Another big negative is rising government debt.

But political hurdles lie in the way. Prime Minister Atal Bihari Vajpayee has said he is committed to reforms but hardline allies of his Bharatiya Janata Party have attacked moves to open up the economy and sell state assets.

Industry groups said it was now up to commercial banks to pass on the rate cuts to spur the economy. "Banks are lending to successful companies...but are wary of lending to those in need because they worry about non-performing assets," said Bhuyan of the Associated Chambers of Commerce and Industry.

Ashok Soota, head of a key business lobby, the Confederation of Indian Industry, added high deposit interest rates "militate against any appreciable fall in lending rates in the short-term".

"More reforms are needed in banking before we see real interest rates competitive with the rest of the world," he said.

(Additional reporting by Unni Krishnan and Beverly Mathews in Mumbai)

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