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'The credit policy will not kickstart the economy'

Amberish K Diwanji in Delhi

"Any credit policy that can provide resources to industry is welcome," says Godrej & Boyce managing director Jamshyd N Godrej. He was reacting to the new credit policy announced by Reserve Bank of India Governor Bimal Jalan on Wednesday.

The policy cut the bank rate by 1 per cent, cut preshipment interest rate also by one per cent, but retained the status quo on the cash reserve ratio with the promise to review it later.

Godrej hoped the policy would lead to growth and reiterated that anything which reduced the cost of money and made more credit available was good for industry and the economy. Banks, he added, must now get over their fear psychosis and start lending money to industry.

Yet, many feel the credit policy did not go far enough. Perhaps the many policy statements to spur growth by various politicians had raised great expectations.

The Confederation of Indian Industry expressed its disappointment, saying it would fail to kickstart the economy. The CII said given the fact that the CRR had not been cut and that money supply had been targetted only at 15 to 15.5 per cent it would be difficult for India to achieve a growth of six to seven per cent of GDP.

Dhruv Sawhney, chairman and managing director of Triveni Engineering and Industries Ltd, pointed out that a major problem is that real interest rates have gone up. "We can reduce bank rates from 10 per cent to 9 per cent whereas our competitors abroad pay an interest of only 2 to 3 per cent," he said, adding, "A gap of 7 to 8 per cent is too high for us to compete effectively against multinationals."

Sawhney said the system needs to become less high cost for Indian industry to be globally competitive. "It cannot be taken care of by the government on a one shot basis. Banks have to lend more and for industry to benefit, the cut in bank rates must translate into lower costs for consumers and industry."

He insisted he would have been pleased had the CRR had scrapped, but added that any move to cut rates is welcome. "But I am not sure how much it will help us," he said, "because banks have borrowed money at very high rates."

He said the government must chart out a plan on interest rates. "We must decide what interest rates we want in 2000, and work backwards from there. But I don't see that happening," he complained.

Rajive Kaul, chairman and managing director of Nicco Corporation Limited, echoed Sawhney. "The credit policy on the whole is quite good, but it will not kickstart the economy," he said.

Kaul, who went through the policy carefully, said the best aspect was the cut in the bank rate and preshipment interest rate. The latter will be particular useful to exporters who have of late been crying themselves hoarse.

He lamented that the latest policy statement was silent about non-banking finance companies and said they continued to be an unfavoured lot. But he was pleased with the policy statement on the creation of universal banking. "Corporates need universal banking," he felt.

Kaul said the best part of the policy was that it would now put pressure on banks to lend more. Asked to rate the policy on a scale of 1 to 10, the former CII president replied, "Six and a half," and then added, "let me be a bit generous; seven."

Sawhney felt the credit policy was only one part of the entire economic package and it alone could do little to boost growth. This particular sentiment was echoed by many of his peers, most of whom said all eyes are now on the Budget. After hearing the rousing speeches by ministers at the CII convention this week, most businessmen expect a forceful Budget.

"The credit policy is a step in the right direction, but it will not amount to much by itself," says N Shankar, chairman of the Sanmar Group. "One should not draw too many conclusions from the credit policy alone, because the RBI has to control inflation and therefore cannot be too lax. Much will depend upon the Budget and the government's fiscal polices."

CII vice-president and Mukand Iron and Steel managing director Rajesh Shah said the RBI had been too cautious in its policy. "The RBI has cut the bank rate by one per cent, but we feel it could have gone further and also reduced the CRR. The policy is not growth oriented." The RBI, Shah added, must now look ahead to announcing measures that will boost the stock markets and bring back investors.