Examine Cap On Growth, Says Tarapore
Addressing the general commitee of the Bombay Chamber of Commerce and Industry in Mumbai yesterday, Tarapore said, Kick-starting an economy when industrial growth is negative or zero is one thing and kick-starting an economy when industrial growth is running at full blast can only assure a sharp slump down the line.
The statement assumes significance in the light of the prime ministers address to industrialists at the Assocham meeting to kick-start the economy. The speech was Tarapores first after retiring from RBI last month, and comes two days before the central bank is due to unveil its busy-season monetary policy. The economy cannot sustain a real growth rate beyond 6.5 per cent given the savings rate of 24 per cent of GDP, a balance of payment and current account deficit of 2 per cent of GDP and a capital output ratio of 4 per cent, he said.
The industry needed to know that the days of development financial institutions were over as they were no longer in a position to provide credit at sub-market rates of interest, he said. Real rates of interest, he said, would continue to remain high unless the industry forced the financial sector to re-think its approach towards industry.. He called for stricter credit discipline among banks and FIs.Banks and financial instutions will perforce impose increasingly stricter standards of credit discipline, Tarapore said.
There must be two-way signalling between banks and FIs on the one side and industry on the other on cost and availablity of credit. It is of great concern that there has been an unprecedented and absolute contraction of non-food bank credit in the first half of the current financial year and yet interest rates have continued to remain high. There has also been a distinct slowdown in sanctions by FIs, he said. On the concern expressed about recession, Tarapore said, My concern is not much in the intensity or the extent of the slowdown as much as the remedial measures.
Looking to inflation as a panacea to achieving lower real rates of interest will be a dangerous policy as it will eventually deepen recession. Larger public spending will lead to further monetisation, which will in turn lead to further rise in inflation and nominal rates of interest.
Creation of money is not the way out of an impending slowdown. Industry, he said, needed to send out a signal to the financial system that it would rather do without credit rather than pay such high rates of interest. Assessing the commercial paper market is one of the most powerful signals that industry can send to the financial system on interest rates, he said.