LOWERING OF INTEREST RATES FOR LENDING.
The Finance Minister Mr.Arun Jaitley called for lowering of interest rates
to trigger growth.He says that the current interest rates are disincentive.
As inflation is stabilising he sees there is room for reduction of
interest.But the Reserve Bank of India does not seem to buy this
argument.As Central bank they feel that the time is not still ripe for
reduction and wish to wait for sometime till the inflation really
stabilises .Both the arguments seem to be right.But can pure economics
outweigh certain ground realities?.
If the Central bank reduces interest rates,the commercial banks will also
reduce their own interest rates.Lower interest rates make loans cheaper
which may lead to aggregate demand and spur economic growth.However,
it may even cause inflationery pressure which is worrying the RBI.What
worries the government is low credit offtake and the poor performance of
the manufacturing sector.Higher NPA's in the banking sector has lead to
"defensive banking" and the banks are shy of lending to manufacturing
sector for the fear of adding more to the NPA's.This trend is not healthy
in the long run.
One thing is sure,lower interest rates makes borrowing cheap which will
give a boost to the manufacturing sector and the demand for credit may
increase .This may even lead to higher economic growth and an increase
in real GDP.The government with people's mandate has certain duties
to perform like giving a boost to manufacturing sector which may lead to
increase in employment and also has to fulfil the Prime Minister's "Make
in India" for the world campaign.