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Kelkar favours interest rate cut for industrial growth

Finance Secretary Vijay Kelkar today advocated a further cut in interest rates and greater vigilance on exchange rates to push industrial growth on to the double-digit regime.

Responding to queries raised by All India Congress Committee economic affairs secretary Jairam Ramesh, Kelkar said in future, there would also be greater dependence on the capital market to ensure industrial growth.

''We have to accomplish three things for proper growth -- bringing back investors to the capital markets, ensuring that interest rates continue to move downwards and having a greater vigilance on exchange rate,'' the finance secretary said at the meeting organised by the Confederation of Indian Industry in New Delhi.

Private investments, he said, are now turning out to be the engine of industrial growth rather than public investments. ''With private investments now playing a dominant role, interest rates would hold the key to proper growth.''

Speaking on the occasion, Ramesh also said that there was scope for a further cut in the real rate of interest. ''In the last few years, inflation has come down drastically and, in that regard, the real rate of interest is still very high. In this light, there is scope for further reducing the real interest.''

However, he cautioned that the relationship between interest and savings rates need to be kept in mind before adjusting the former.

But he negated the industry's statement that high interest rates have been one of the reasons for industrial slowdown. ''Interest rates were very high when the industry was booming and now when the industry is on a downslide, the rates are much lower.

"Moreover, prime lending rates have fallen from 16 to 13 per cent at a time when industrial growth has also nosedived from 12 to six per cent. So the argument that high interest rates were responsible for industrial downswing is not convincing.''

He further rejected the arguments that credit squeeze, import liberalisation, world deflation and lagged effects of agricultural output declines were the reasons for the slowdown. ''Instead, market saturation, restructuring and consolidation and investment slackening are the real reasons for the present slowdown,'' he added.

Ramesh rejected the industry's demand for relief packages for segments, stating that companies should be allowed to restructure on their own. The government should allow free takeovers, mergers and acquisitions as ''this would lead to consolidation and result in growth''.

''Cement industry is the first segment which has shown fundamental sign of change and restructuring by way of nine mergers over the last two years. But barring a few other sectors, I don't see other segments following the same trend.''

According to Ramesh, textiles, basic metals, non-metallic mineral products and industrial machinery are the worst sufferers in the industrial slowdown.

The primary market and non-banking finance companies' collapse in the 1990s affected several industrial sectors and accentuated the slowdown.

He further stated that the country has been plagued with an investment famine and public investments have ceased to be the catalyst for industrial boom.

''In the present situation, when the Centre's contribution to capital expenditure is down, we need to look at the capital expenditure of the states and the quality of expenditure to see growth. We need to focus on market structure, investment expenditure and maximising the quality of outlay as well as the type of demand it generates to have sustained growth of over nine per cent.''

UNI

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