The downward interest rate adjustment by China on August 25 is not only a late move but also following a wrong sequence of adjustment of economic tools.
The devaluation of the yuan should have happened at least four years ago when economists such as Paul Krugman were sounding early alerts on the cooling of the Chinese economy.
The US dollar looks overvalued and American think tanks have said the Fed Reserve rate hike might be postponed to 2016. Economists are assessing the impact of a strong dollar on growth. Further, the US presidential election will take place next year. Job creation is getting attention. Republican Party hopeful and tycoon Donald Trump does not like Chinese imports and outsourcing to India.
Oil prices have touched record lows and oil exporting countries are facing a major crisis. The Iran nuclear deal has provided impetus to plumeting oil prices.
The fall in the prices of core industry commodities iron, steel, aluminium and cement does not bode well for economic recovery. In such a situation, what can banks do? If they are saddled with non-performing assets, a drop in the interest rate will not be enough to prop up their bottom line. On the contrary, if there is no pick-up in credit growth, that is new borrowing, the sector will find itself in the red. The government's effort to infuse capital is welcome, but the financial rejig of banks depends on economic recovery.
Window-dressing the economy is a bad idea at this point. What is needed is a series of financial measures to stimulate growth. Ease of doing business in Parliament should be the highest priority.
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The devaluation of the yuan should have happened at least four years ago when economists such as Paul Krugman were sounding early alerts on the cooling of the Chinese economy.
The US dollar looks overvalued and American think tanks have said the Fed Reserve rate hike might be postponed to 2016. Economists are assessing the impact of a strong dollar on growth. Further, the US presidential election will take place next year. Job creation is getting attention. Republican Party hopeful and tycoon Donald Trump does not like Chinese imports and outsourcing to India.
Oil prices have touched record lows and oil exporting countries are facing a major crisis. The Iran nuclear deal has provided impetus to plumeting oil prices.
The fall in the prices of core industry commodities iron, steel, aluminium and cement does not bode well for economic recovery. In such a situation, what can banks do? If they are saddled with non-performing assets, a drop in the interest rate will not be enough to prop up their bottom line. On the contrary, if there is no pick-up in credit growth, that is new borrowing, the sector will find itself in the red. The government's effort to infuse capital is welcome, but the financial rejig of banks depends on economic recovery.
Window-dressing the economy is a bad idea at this point. What is needed is a series of financial measures to stimulate growth. Ease of doing business in Parliament should be the highest priority.
Kannan Subramanian Chennai
Letters can be mailed, faxed or e-mailed to:
The Editor, Business Standard
Nehru House, 4 Bahadur Shah Zafar Marg
New Delhi 110 002
Fax: (011) 23720201
E-mail: letters@bsmail.in
All letters must have a postal address and telephone number