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The Rediff Business Special: Nikhil Faleiro

Credit policy aims to turn around recession

It is meant to give an additional push to the sluggish economy. This is precisely what the Reserve Bank of India did at its busy season credit policy which was announced by Governor C Rangarajan on Tuesday, October 22.

Announcing the various measures which would release an additional Rs 96 billion into the economy, Rangarajan had said, "It's is up to the banks now to lend money and help kickstart the economy back on the track. With these new proposals, I am only drawing attention to some areas where acceleration of credit is desirable."

With industry crying itself hoarse over the lack of funds in the economy, a desperate RBI cut the bank rate from 10 per cent to nine per cent, and will reduce the cash reserve ratio by two per cent in a phased manner. There is strong evidence of an industrial recession having set in; shops are bursting with stocks of unsold premium consumer goods. The sluggishness in the consumer industry, including automobiles, has spread to basic and capital goods. Examples:
-- Whirlpool of India, predominantly a maker of refrigerators, after a gallant beginning a few years ago, has recorded a negative growth of eight per cent this year;
-- Ashwani Windlass, CEO of Max Touch, reports a 40 per cent gap between usage of air time on cellular phones and its projection;
-- In the automobile city of Pune, Lucknow and Jamshedpur, TELCO's despatch yards today resemble a graveyard. Vehicle stockpile, which was 4,177 at the end of March, is 16,544 now!;
-- commercial vehicle sales were down by 19.3 per cent between April and July. Mahindra Ford has cut production from 55 cars a day to 40;
-- Demand for cement, a trusted index of economic growth, has taken a downturn. In Bombay, a 50 kg bag of cement, selling for Rs 172 in June, is now quoted at Rs 150. Even then, there are hardly any buyers.

Industrial growth for the first quarter of the current fiscal year was 5.2 per cent against the 12 per cent in the first quarter of the previous fiscal year, while the manufacturing sector moved down to 4.8 per cent against 15.4 per cent a year ago; export growth was only 6 per cent, turning the robust growth figures of 17 to 21 per cent in each of the fiscal years between 1993 and 1996 into history.

In the financial sector, banks were lending to the government alone, crowding out private borrowing. Worse, the first-half collection of both customs and excise revenue fell far short of expectations. The finance ministry tom-tommed a rise in advance direct tax collections at the end of the first six months of the financial year. But the rise, of around 13 per cent, paled in the context of the supply side hope that lowering of tax rates would trigger the incentive to earn a lot more and pay exponentially higher taxes.

Investment has taken a seemingly irreversible nose-dive for the investor. On every trading day, there are markets have become a nightmare for the investor. On every trading day, there are three or four times more scrips recording "new lows" than those touching "new highs." Earning are down, and so are pre-expectations. The lack of confidence in the secondary market has seeped into the primary market. In the first half of fiscal 1997-98, subscription raised through primary issues was only Rs 3.60 billion, a measly six per cent of the previous year's low figure of Rs 60 billion.

It is due to these dismal factors which had dragged the economy down that resulted in the RBI governor announcing the far-reaching decisions. Moreover, the RBI totally deregulated the interest rates on deposits (above 30 days); and by raising bank revenues by freeing the lending rate for term loans on three years, the RBI has attempted to make banks more profitable.

Says Rana Kapoor, general manager, ANZ Investment Bank, "By increasing the lendable resources to the corporate sector, the RBI is attempting to kick-start the economy. This will benefit the mid-sized corporates because the government has finished its borrowing programme and the top corporates have met their needs from the capital market."

On a different note, it is government desire to move closer towards capital account convertibility that has seen the maximum number of changes in the second half credit policy. As per the RBI's directive, mutual funds will be allowed to invest up to $ 500 million in overseas markets with a ceiling of $ 50 million in individual funds. Similarly, project earners will no longer have to approach the RBI for approval because the authorised foreign exchange dealers have the power to grant the approval.

Also, by allowing corporates to open offices abroad without RBI approval, they have been given the freedom to expand their operations overseas without fetters. Says Ramu Deora, president of the Federation of Indian Export Organisations, "This is a step in the right direction as it will enable corporates to meet the challenges of global competition head-on."

With the RBI introducing changes to further loosen the purse string and make the debt market and capital market more attractive, the RBI is hoping that the capital market will get tremendous boost from this policy. Nimesh Kampani, chairman, J M Financial, says, "The current credit policy in line with the continuation of the financial sector reforms by lowering the interest rates to match global interest rates. The policy is positive and will give a further boost to the long term equity markets."

And with such incentives, it will not be long before the economy moves towards global standards.