A friendly push

two per cent reduction in the cash reserve ratio which will free Rs 10,000 crore for potential borrowers over the next five months. These are intended to boost the offtake of credit and stimulate growth. No one can quibble with the fact that these steps were necessary in the context of an industrial slowdown and less optimistic estimates of GDP growth. But the general effect of the RBI’s measures is to load more dishes on tables already groaning under food.

The banquet, it would seem, is beyond reach for one or both of the following reasons. One, banks were already flush with funds before the new policy but averse to taking risks so most of their lending went to the government. Two, industry shows reluctance to borrow at any price. There are partial answers for the first of these conundrums. Banks cannot perpetually remain awash with funds. With the government borrowing programme for the financial year said to be almost complete, banks will have no other recourse but to look at business and industry.

Spurred by the deregulation of domestic deposit rates, they will have to learn quickly how best to manage their assets and liabilities to maintain profitability. How far competition between banks will actually push down interest rates will have to be seen over the next few months. Some of the larger corporates may still find it worth their while to continue borrowing abroad until real interest rates fall in India consequent to a rise in the rate of inflation. That is not likely to occur as long as stockpiles are high and there is overcapacity in some sectors. Banks will have to look for other corporate borrowers, and to trade, the service sectors and start-up companies if they want to keep their heads above water. Better risk management is called for; they cannot avoid risk altogether. No one promised that banking in the new liberalised age would be a cakewalk.

As for industry, there are limits to what monetary policy can do there to increase the appetite for credit as long as demand is sluggish, the infrastructure primitive and government policies in a state of suspended animation. More stimuli are essential on top of what hefty Pay Commission pay packets and arrears are expected to do for the consumer goods sector and the RBI has done for the housing and automotive sectors. Serious government investment in the infrastructure cannot be postponed now that private sector investment in power, ports and roadways has been seen to fall far short of the requirements and is not expected to pick up anytime soon.