Need lower rates to help growth: FM

Need lower rates to help growth: FM
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First Published: Wed, May 27 2009. 04 25 PM IST

Updated: Wed, May 27 2009. 04 25 PM IST
New Delhi: Indian commercial banks should lower their interest rates, taking cues from the Reserve Bank of India (RBI), and step up loans to the industry to help bolster sagging growth, the finance minister said on Wednesday.
Pranab Mukherjee said reviving growth momentum was a top priority for the ruling Congress party-led coalition, which was re-elected for a second term.
“One of the first steps I propose to take is to meet bankers and get them committed to a more benign plan of action,” he said, addressing his first news conference after the election victory.
The government is also committed to fiscal consolidation in the medium term, he said.
Also Read Comments from analysts (PDF)
The banking system in Asia’s third-largest economy is dominated by state-run banks and they usually react to signals from the finance ministry.
Union finance minister Pranab Mukherjee addresses a press conference in New Delhi on Wednesday. AP Photo
The RBI has cut its short-term lending rate by 425 basis points to 4.75% since October to help the economy pull out from a slowdown caused by the global economic crisis.
But commercial banks have lagged behind with State Bank of India, the country’s top lender, having reduced its prime lending rate by just 150 basis points to 12.25% in the same period.
“While much has been done in the last eight months, and international capital flows have resumed, the cost and the speed with which finance can be accessed remains a matter of concern,” Mukherjee said.
Fiscal Prudence
The finance minister said more borrowing would be required in the current year to spur expansion, and a return to high growth would help the government to consolidate its finances over the next two to three years.
The full budget for the current fiscal year will be presented in the first week of July and approved by the end of that month, he said.
“Prophets of doom have been unduly focusing on increased public spending and consequent increase in the revenue and fiscal deficits in the recent past,” Mukherjee said.
“Let me say unambiguously that we are committed to restoring growth and employment and that would not have been possible without increased spending funded by incremental borrowing.”
“This would need to be further continued in 2009-10.”
Mukherjee said he expected to narrow the federal government’s fiscal deficit in 2009-10 within 5.5% of gross domestic product, as projected in the interim budget, from 6% in the last fiscal year.
“At this point of time, it looks difficult for the government to stick to its fiscal deficit target announced at the interim budget, but it is possible they have identified some revenue sources,” said A. Prasanna, an analyst at ICICI Securities.
India’s fiscal situation has deteriorated over the past year, after making solid gains previously, as growth has slowed significantly.
The central bank projects the economy to expand about 6% in the current fiscal year ending March 2010, below last year’s estimate of 6.5-6.7%.
The economy grew at 9% or more in the previous three fiscal years, helped by good external and domestic demand.
Mukherjee said the government needed to push long pending reforms measures to support growth.
“These include measures in the area of financial sector ... to make the economy more competitive and the economic regulatory and oversight systems more efficient, quick and responsive to global developments,” he said.
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First Published: Wed, May 27 2009. 04 25 PM IST
More Topics: Budget | Stimulus package | Growth | Reforms | GDP |