Down We Go

The aim was to get inflation down to a level where the Congress party could boast about it at the general election in 1996. Inflation did come down to 4 per cent and the Congress did boast about it, never mind that it didn't help.

Now, a year later, the ministry and the RBI are desperately doing the opposite. They are hustling industrialists to borrow who, like the horse at the trough, are refusing to drink.

To entice them, the State Bank of India has cut its prime lending to 15.5 per cent, hoping that other banks will follow. Some have but most haven't. There are also rumours that the RBI may cut the CRR in the forthcoming busy season credit policy to inject some more money into the system and thus force interest rates down further. Rules governing the acquisition of debt instruments by FIIs have also been relaxed in the hope that if bond prices go up, interest rates will come down.

 

Two questions arise in this context. One is if all this will force interest rates down and, the other is, even if rates do come down, will it prevent the recession which now seems to be hovering so menacingly on the horizon?

The answer depends on many things, including the current financial health of companies which, thanks to the liquidity squeeze of last year, is in pretty poor shape.

In Mumbai, at least, not many marketmen believe that the rates will actually come down so as to help avoid a recession or, that even if they do, firms will begin to immediately borrow larger amounts as business activity picks up. They don't think the latter will happen.

In other words, there is a great deal of pessimism around. And it seems to go deeper than anything that the government and the RBI can successfully tackle. There is, in fact, a crisis of confidence which looks like getting worse.

Just what is causing it is hard to pinpoint. There are probably many reasons and the dominant reason varies from firm to firm and industry to industry.

But the fact is that businessmen are going about with hangdog expressions. They are seriously worried about what lies ahead and the government would do well to pay some attention.

One common worry seems to be overall sense of drift. The government and the finance ministry may argue that this is actually not the case and that, in fact, a great deal has been done to make it easier to do business. And they may even be right.

But they nevertheless need to ask why businessmen are refusing to be cheered up and why, in spite of everything, the overall mood is one of grim foreboding.

There is something seriously wrong and the sooner the government finds out what it is, the better it will be for all