MNCs Trust RBI’s Rajan: GUNG HO ON MAKE IN INDIA…

Sarkaritel
By Sarkaritel February 8, 2016 10:33

MNCs Trust RBI’s Rajan: GUNG HO ON MAKE IN INDIA…


MNCs Trust RBI’s Rajan

GUNG HO ON MAKE IN INDIA

By Shivaji Sarkar

Despite the Reserve Bank keeping repo rates unchanged at 6.75 per cent, ignoring the industry clamour for lowering it, US conglomerate Boeing has decided to start manufacturing medium multi-role combat aircraft (MMRCA) to boost Modi’s Make in India. It will create an eco-system to build fighter jets, something which got a jolt thanks to tough bargaining by French Dassault vis-à-vis sale of 36 Rafael aircrafts.

Notably, Boeing’s decision is futuristic as manufacturing in India would not only create a large market for its aircrafts but also its aggressive posturing would be able to sustain high-cost operations due to Rafael’s delayed decision.

Typically, a fighter squadron in the IAF consists of 16 aircrafts (plus two in reserve). But by next March, it would face shortages as 50 Mig-27MLs aircrafts which have not been upgraded in the last 2-3 years would be retired without adding any fighter jets to its inventory. Already, an order has been placed for 120 Tejas MK II though they are not exact replacements of India’s hi-tech needs.

Questionably, does this have any link with RBI Governor Raghuram Rajan’s decision? Apparently, it is linked to a pragmatic approach of not lowering rates in an unstable situation. No matter, Rajan asserting that there is a beacon of stability.

Undeniably, Rajan’s concern for a possible inflationary impact of the Seventh Pay Commission’s recommendations seems genuine. Unfortunately, however, he has linked his decision to the Government limiting its deficit. Whereby, he is seemingly making a political statement which is not the RBI’s mandate.

In reality, the Government’s stingy approach in 2015-16 has led to problems in many of the social sector areas.  As private investments are not coming, the Administration is under pressure to increase its expenses and take a liberal approach to deficit. The larger view being if the Government has a little larger deficit, it would pace up economic development as it would be earning higher revenues.

Besides, the RBI has also to think whether interest rates should be lowered or firmed up in view of the US Fed Reserve’s uncertainty. If America raises rates and India lowers them, there might be capital outflow from India. Already the foreign institutional investors (FII) have withdrawn over Rs 15,000 crores in 2015-16, the highest in seven years leading to a crash of the stock market.

Also, if rates are cut it might lead to mayhem in the stock market, notwithstanding domestic institutional investors (DII) investing Rs 60,368 crores. This is because DIIs are coming in only at lower levels. The sellers, mainly FIIs, are more aggressive.

Thus, Governor Rajan has to ensure infusion of funds alongside protecting small investors whose savings have greased the economy since the 1960s. Small investors, namely, senior citizens, households, women and marginal savers are developing a feeling that their money is considered dirt cheap and given to industrialists, who willfully default on payments. Thereby, not only making their savings insecure but also by cutting rates it aggravates further problems.

Pertinently, these investors need protection of at least a minimum interest rate of 9 per cent. As cheaper rates have resulted in industry sitting on their reserves as borrowing becomes cheaper thereby posing a threat to the banking system. As it stands, the system is suffering from an official NPA of over Rs 3 lakh crores and unofficial Rs 5 lakh crores.

Notably, a higher lending rate, above 10 per cent would act as safety shield and prevent the need for the Government to repeatedly recapitalize public sector banks.

Moreover, the move to set up “bad banks” which would purchase the NPA accounts is likely to help banks reduce their NPA. But they would have to go for a “haircut” — shear off one-third of the lending — almost Rs 1 lakh crores. Again, this will hit the poor as bankers raise charges on various instruments and lower rates on deposits.

Undoubtedly, our banks have to tighten their belts and ensure efficient functioning. Their job is not only to ensure returns on small savings but also to create confidence of companies like Boeing. In addition, when need be, they would stand by their multi-billion operations.

Notably, India is also keen on a blue water navy and the FA 18 is the mainstay of the US navy. Therefore, its manufacturing hub would require the Government’s support either through budgetary prop ups or borrowings from public sector banks.

Consequently, there is need for healthy banks which would be able to withstand the large funding requirements for the Make in India, Start-up India Stand-up India, Digital India and many other initiatives.

Clearly, the RBI has a difficult challenge as regulator for banks. If it does not strengthen the banking structure, the dream of making the country a hub of manufacturing might falter. Simultaneously, it also has to ensure that banks grow to match the needs of global giants, who are eyeing a manufacturing base in India.

 

Hence, Rajan’s “beacon of stability” statement is an indication of stable and sustainable growth. The RBI has pegged growth at a higher level of 7.4 per cent even as the Government envisages 7.2 per cent. In fact, the RBI Governor hinted 7.6 per cent for a fiscal 2016-17.

Does this mean more large foreign investors like Boeing would be coming? This is a possibility. Boeing is said to have a vision and that is why it is keen on coming to India as also Swedish giant Investment AB Kinnevik, known for backing German firm Rocket Internet. Reportedly, it is looking at investing in technology-based ventures in areas like education and healthcare. Kinnevik aims to increase its share of investment to a tenth of its global operation over the next five years.

All in all, it seems new investors trust India more. This also indicates that indigenous corporate demands for lowering rates are not rational. Governor Rajan has to look at these trends to firm up rates for stable growth through Make in India initiative and strengthening the Indian rupee. —- INFA

 (Copyright, India News and Feature Alliance)

Sarkaritel
By Sarkaritel February 8, 2016 10:33