October 20, 2019

Rate Cuts will not reverse Slowdown

THE Bank Employees Federation of India(BEFI) has stated that the interest rate cuts will not reverse the slowdown presently witnessed in the country. Reacting to the bimonthly policy statement of the RBI released on October 4, the BEFI issued the statement.

The BEFI has stated, “Monetary Policy Committee (MPC) of Reserve Bank of India, on  October 4 has reduced the key bank rate or the rate at which the RBI lends to banks for the fifth time in a row since February, till now by 1.35 per cent bringing it to 5.15 per cent and intends to continue further cuts to revive growth in the economy. This is causing reduction in the interest rate on people’s savings in bank deposits hurting the households already suffering for lowering of incomes and alarming increase in prices of essential commodities. 

The rate cuts have not and will not reverse the slowdown in the economy. Rather it will further penuries the household thereby further shrinking the market. Neither the government move to cut basic corporate tax rates to 22 per cent from 30 per cent for domestic companies, the concessions to the auto industry, real estate or export houses nor the reduction of surcharge on capital gain of investors will revive the market. The crisis is policy induced by the government where the purchasing power of the people has been drained. It may at best provide a sugar-rush to the top 1 per cent beneficiaries of our economy fetching an increase in their post tax profits. With shrinking tax revenues and corporate tax cuts the government may cut welfare expenditure to contain its fiscal deficit further accentuating the crisis.

On the other hand, Indian household savings, the pivot of the economy, have steadily declined from 23.6 per cent of GDP in 2011-12 to 17.2 per cent in 2017-18, as per available RBI data. Families are forced to use up their savings and take loans to meet rising costs of living especially on health and education. Loans of the Indian household surged 58 per cent to Rs 7.6 lakh crore in the last five years.

In order to ensure monetary transmission by commercial banks against the repo rate reduction of 1.10 per cent on their lending rate, pursued by the government repeatedly, the RBI mandated all banks to follow its external benchmark of repo rates and reduce lending rates from October 1. The linking of lending rates to an external benchmark may result in the linking of deposit rates to prevent operating losses for the banks. But the argument that it will enhance credit dispersal is farfetched. The banking system remained flushed with liquidity while inter-bank average call money rate traded below the policy rate. Despite it, the incremental bank credit to industries and services witnessed contraction of 3 per cent and 4.3 per cent respectively. With the economy fast advancing towards a recession, due diligence in banking with looming default risk, a retardation in credit will prevail.

The MPC states industrial growth including the core sector, capital goods and consumer durables has further contracted. The service sector continued to slow down. The RBI consumer confidence survey reveals very weak consumer sentiment. So the RBI has reduced the GDP growth outlook for 2019-20 to 6.1 per cent from 6.9 projected in the last MPC meeting after its projection of 5.8 per cent growth in the first quarter went horribly wrong when India registered a 6-year low of 5 per cent GDP growth. In nominal terms, it is the lowest since December 2002 when the growth stood at 7.99 per cent.

While the MPC pitched for lowering of lending rates, most blatantly it lauded the role of micro-finance institutions in providing high-cost credit to the lowest rung of the economy. It has widened the scope and quantum for lending to borrowers at the NBFC-MFIs. In the NBFCs, the share of bank borrowings to total borrowings has increased from 21.2 per cent the in March 2017 to 23.6 per cent in March 2018 and further to 29.2 per cent in March 2019. Between September 2018 and 2019, banks have lent Rs 1.9 lakh crore to the NBFCs, growing their portfolios by nearly 40 per cent over Rs 1.43 lakh crore the previous year as per the latest data of RBI. Nudged by the government/RBI, in a reckless outsourcing of bank lending, the proportion of total advances of PSBs to unstable NBFCs has reached alarming proportions.

Already income tax collections are declining even as overall tax base continued to widen from the government’s quest to formalise the informal unorganised sector of the economy. The implication is that in spite of increased level of deficit in the budget, demand will not be boosted by concessions to corporate. The problem did not originate in low levels of profits but as a result of shortage of demand and lower levels of production. Raising levels of profits of the corporate will not increase demand in the market.

The BEFI demands of the government to reverse the additional 2.3 per cent of GDP of the tax-payers money that had been provided as concessions to the private corporate sector and the proceeds be channelised to the unorganised sectors – farmers, workers under MNREGS and the informal sector, on social infrastructure especially in rural areas, which will perk demand in the economy leading to higher capacity utilisation, profits and investment.”