Rate hikes to keep bean counters wringing

Rangarajan Alerts India Inc To Factor In Higher Interest Costs In Future Planning

THE worst isn’t over. It may be wiser for India Inc to prepare for more interest rate hikes in the coming days. The chairman of prime minister’s economic advisory council, C Rangarajan, has warned India Inc of the possibility of further interest rates hike and to factor in higher interest costs in their future planning to mitigate adverse impact of interest rate hikes. Justifying the monetary measures initiated by the Reserve Bank of India, Mr Rangarajan underscored the need to contain inflation that can be achieved through various monetary measures the central bank has recently taken. High inflation is inconsistent with high growth in the long run. Policy makers need to do a balancing act of keeping inflation low and maintaining the growth momentum, he said. Prudent policy measures in 1995-96 helped avert the impact of the Asian crisis in 1997. Similarly, the monetary authorities are right in taking the measures at a time when money supply growth is high in order to prevent future troubles. Corporates must also factor in the possibility of rising interest rates. Inflation cannot be brought down if money supply growth is high and, therefore, there is a need to keep inflation low by restraining money supply growth and credit growth, he said. Sustained high inflation could be counterproductive and also have adverse impact on savings. Mr Rangarajan was addressing a round table discussion, An economic architecture for 10% GDP growth, organised by the Bombay Chamber of Commerce & Industry in Mumbai on Monday. Although inflation was much higher in the 1980s and 1990s, it was against the backdrop of high global inflation. However, inflation has come down globally, and, therefore, there is a need to moderate inflation now, he said. As a result, the acceptable levels of inflation for the economy are also much lower now. One of the signs of overheating in the economy is when inflation and current account deficit are running high. In India, inflation is running higher than the accepted level of 5.5%. Regarding current account deficit, it is not likely to exceed 1% of GDP. However, trade deficit is high at 6-7% of GDP as the surpluses of the services sector have helped to offset the trade deficit to an extent. Thus, it cannot be denied that there are signs of overheating, he said. However, he said, overheating at present is cyclical in character and we should take care to prevent cyclical overheating from becoming structural overheating. It is in this context that a greater emphasis on availability of power assumes importance. He outlined six challenges for the economy to maintain the high-growth momentum. These include stepping up agricultural growth, infrastructure development, fiscal consolidation, building social infrastructure, managing globalisation and good governance.

Courtesy: EconomicTimes