New Delhi: The Indian economy could do with another cut in interest rates as growth remains weak in the opening months of 2009, although the decision was up to the central bank, a key government adviser said on Friday.
And ahead of the interim budget on Monday, the government said it would continue to stimulate demand in an economy expected to grow at 7.1% in the 2008-09 fiscal year ending March, its slowest pace in six years.
Suresh Tendulkar, chairman of the Prime Minister’s Economic Advisory Council, said a 2% annual fall in industrial production in December was worrying but not unexpected, and said it would take time for policy steps already taken to show results in boosting activity.
“(A) cut in interest rates is desirable but the final decision has to be taken by the RBI,” Tendulkar said, referring to the Reserve Bank of India.
“You have to give some time for existing measures to work. It is not like coin operating machine, that you put coin at the top and get coffee at the bottom,” Tendulkar said.
The central bank cut its key lending rate by 350 basis points between October and early January. It kept its key rates unchanged at a review in late January, saying banks had to pass on the benefits of its previous rate cuts.
The government has slashed factory gate duties, announced relief schemes for exporters and pledged extra spending to protect jobs and underpin growth, which is slowing from rates of 9% or more in the past three fiscal years.
“The government is going to continue to stimulate domestic demand, the government will continue to inject liquidity and induce bank lending,” commerce and industry minister Kamal Nath said.
“Indian banks have liquidity. It is important that banks lend because the credit system, for it to work efficiently, must have an efficient banks’ lending system,” Nath said.
On Wednesday, the government said it would inject Rs3,800 crore ($780 million) into three state-run banks by the end of 2009-10, part of its plan to improve the capital adequacy ratio of state-run banks to 12%.
As growth has slowed, wholesale price inflation has fallen sharply in India. From just below 13% last August, annual inflation fell to 4.4% at the end of January and some economists think it could turn negative in coming months.
India’s chief statistician told Reuters that was possible, but added such an event would not equate to deflation.
“For it, we need to track month-on-month inflation, year-on-year inflation makes no sense. There is no chance of deflation yet,” said Pronab Sen, secretary at the ministry of statistics and programme implementation.