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The Question Of Interest Rate

‘Children of a Lesser God’

Asis Ranjan Sengupta

The reduction of Bank or Small Savings deposit interest rates in India is definitely not in the interest of the people. A lower interest rate in fixed deposits in Banks or Post Offices is sought to be justified in terms of declining rate of inflation. The lower rate is the constant desire of the government stated to be for promotion of investment.

The Central Bank of India is a regulator of finance market, and frame monetary policy which may not be in the welfare of the public, as they are not concerned with welfare which is the concern of the government who are answerable to the house of representatives of the people.

Unfortunately the small depositors who depend badly on interest income, particularly the middleclass and the senior citizens, are afraid of investing in stock market or other investment channels, because of their incapacity to undertake or bear with risk, remain unheard in public domain. The constant publicity blitzkrieg launched by crony corporate / business house lobbies in close collaboration with the media, leaves the affected section neglected, unheard and deprives them of the dignity they deserve.

The advocates of reduction of rates, cite the example of developed countries like USA or Japan, where in some cases even negative rates prevail. But the point they cleverly hide is the strength of currency and exchange rate. In economic theory, the cross country rate differential is explained by expected depreciation in the exchange rate, translated in inflation rate with some assumption on purchasing power parity condition and a risk premium beyond fluctuation in prices. But these international parameters are conveniently ignored when demand for lower rate is placed by the brazn faced hired pseudo economists. To arrive at real interest, as per theory, one has to calculate the long run real interest rates, and its fate of interest by subtracting from fixed deposit rates. But on the basis of this method, the real interest rate, applicable in those countries, is denied in India.

Banks must be happy to pay out less as interest burden, when the load of non-performing assets is skyrocketing. The big shots who are defaulters and their associates are the lobby who shout most loudly for the reduction. Thus by adjusting the government is passing the buck of repayment failure burden to the poor small depositors.

The Reserve Bank of India, who is responsible for inflation targeting, regulate the money market, the volume and circulation of money, by adjusting Repo Rate. But bad debt ridden Banks are hardly in a position to pass over the benefit to the borrowers. Moreover in Indian money market, where black money is stronger than the good money, the repo rate is a 'blunt instrument' (Arundhati Bhattachrya, CMD, SBI), in determination of applicable interest rate.

Unfortunately, Indian Stock Market is never a destination of fair trading people. The economy is never that much healthy to attract good investments. Even if one can say that gone are the days of Harshad Mehta or Ketan Parekh under the strict surveillance of the market regulator SEBI. Still Indian Stock Market health is largely dependent on external Participatory Notes investments, which are highly volatile and dubious. So comes the question of making rates of Banks or Post Offices, unattractive so as to drive the small depositors to the risk prone market for the immediate gain of the business houses, but might prove perilous to the run of the mill investors, Tom Dick or Harry.

Moreover, what these hawks of lower rate cleverly bypass, is the existing strong social security network in the countries with whom India compares itself, but badly lacks anything. The health care, education and the basic amenities are the responsibility of the state in those counties. Senior citizens are taken care of in all respects by the state. In India senior citizens are deprived of healthcare even at a high cost. So, the deposits in Banks and Post Offices, and the interest income compensate partially at least the non existing social security, which is put at jeopardy, to the peril of the helpless majority, when the interest rate is threateningly lowered.

There is another common misdirected argument that lower rates stimulate business investment conditions. Let the government publish one white paper in support of such claim, providing details of such examples from the history of Indian economy. On the contrary it shows that Industrial and Business boom have no correlation with cost of capital. Investments in Business and Industry were much higher and robust in the period between 2006 and 2010, when rate was harder than what it is since 2014 when the rates are comparatively lower. In past also one observes no link with boom or slum with cost of capital. Will the ministry of finance let the people know how many of the closed units appearing as non-performing assets in the books of Banks, became sick solely due to the cost of capital?

There will be a handful few, who suffered due to various other reasons and unscrupulous entrepreneurs and now, find a scape-goat in the high cost of capital.

The strategy of "beggar thy neighbour" by lowering forex rates, and weakening the currency, and lowering Nil or Negative rates have backfired in most of the developed countries, including UK, USA, and Japan. They sought to beggar their neighbours like Greece, Portugal, Spain, France etc, but in the long run, themselves are adversely affected. That is why the Greece crisis, Brexit and rise and popularity of a racial fanatic like Donald Trump in USA, all of which are threatening their democratic social and political texture. That is why eminent international Economists including Rajan and Kaushik Basu are now strongly pleading for a prudent revisit to the issue of manipulating the economy through interest rate mechanism.

Even the policy of linking the interest rate solely with inflation is not a practical or wise standpoint, because in the calculation process of retail inflation rate, the economy, the ever astronomically rising cost of either education or healthcare is never taken into account. So the widely accepted formula of 'premium over risk and inflation adjusted global rates' should be adopted to help the medium or small lenders as well as investors. The impacts of 'policy failure' of the government must not be passed over to the small fries.

By lowering the interest rates to the bottom level in Banks, the government is just usurping the surplus of the depositors and pumping that to cross subsidise the wealthy and the rich. Due to the existence of an imperfect credit market, here to become a legitimate entrepreneur, one has to be convincingly affluent. So, as the major source of financing the business in India, the government has to channelize the money of the poor to the rich. And a reduced interest rate helps that evil mechanism. So, treating the small depositors as 'Children of a Lesser God' is a malignant feature of the Indian politics. It has got nothing to do with the welfare of the people, which should be the sole concern of any state, and that is exactly what justify the existence of institution of state, as it is,where the governments are but 'elected' bodies to look after that purpose properly.

[sengupta asisranjan@yahoo.in]

Frontier
Vol. 49, No.11, Sep 18 - 24, 2016