‘High interest rates a deterrent to growth’

July 24th, 2008 - 5:56 pm ICT by IANS  

New Delhi, July 24 (IANS) High interest rates will act as a deterrent to Indian economic growth, which reached 9 percent in 2007-08, a leading industry lobby said here Thursday. The industry lobby, Associated Chambers of Commerce and Industry (Assocham), has also advised India’s central bank - the Reserve Bank of India (RBI)- not to tighten further money supply in an effort to rein in the double-digit inflation.

Assocham president Sajjan Jindal said “high interest” might push the “economy into low growth”, and raise default rates too.

“Economy may slip into low growth phase, causing large number of job losses if the RBI chooses further tightening of interest rates to contain rising inflation,” Jindal said in a statement.

“The present interest rates are at peak and any further rise in the rates will hamper the growth and employment outlook for the economy,” he said.

Assocham said the RBI had already increased the cash reserve ratio (CRR) by 125 basis points since April this year, and repo rate has been revised upwards by 25 basis points.

“On the contrary, the central banks of Japan and Canada have kept their interest rates unchanged,” said Jindal, adding that further rise in the interest rates might lead to rise in the default rates.

“Instead, the government should focus on reforms in education, agriculture, telecom, insurance, provident fund, and retail sectors as a long-term strategy to counter inflationary forces in domestic and external economic system,” the chamber said.

“In the first quarter of the year 2008, the interest cost for India Inc rose by more than 28 percent,” he said.

The issue of high interest rates was discussed at Assocham’s 150-member managing committee meeting in Mumbai Thursday, following which a statement was issued here, drawing the government’s attention to the ramifications of high interest rates.

Jindal said the industry was faced with an increasingly difficult task to sustain business environment in a high interest rate, higher inflation and tax regime.

“India with 7.29 per cent of unemployment rate cannot afford to ignore the slowdown in major job-oriented sectors such as information technology, financial services, automobiles, construction and manufacturing,” Jindal said.

“Rise in interest rates will further push costs of production, in short run, leading to higher inflation.”

Jindal, also the vice-chairman and managing director of steel major JSW, said excess demand, built up on account of continuous high growth in the past four years, had already begun to subside.

Referring to the index of industrial production (IIP) at 3.8 percent for May 2008, the industry lobby said the manufacturing sector, specifically small and middle scale firms, were hard hit by sharp rise in input costs, lower demand, huge interest bills and global slowdown.

Instead of increasing interest rates, Assocham favoured the RBI’s intervention in the foreign exchange market to strengthen rupee and relaxation on capital outflows.

Since the global meltdown has induced a bearish phase in India’s stock market, the secondary markets have seen more than 40 percent fall in last six months from their peaks.

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