Selective stimulus plan in the works to revive growth; some sectors may get direct line of credit-ET 23rd September 2013
NEW DELHI: India is eyeing its own version of quantitative easing to selectively revive sectors to boost overall growth. The finance ministry and Reserve Bank of India (RBI) are in talks to arrive at a mechanism to provide a direct line of credit to some industrial sectors.
While new RBI Governor Raghuram Rajan opted to tighten monetary policy on Friday, saying the US Federal Reserve will wind up its bond-buying programme sooner or later, the finance ministry is of the view that a precisely directed stimulus programme will help revive flagging growth without undermining the central bank's inflation focus. One of the options under discussion is for the central bank to set up a special window to buy commercial paper from companies in the chosen sectors at preferential rates.
"A number of options are on the table... we are working on a mechanism that will allow credit to reach some sectors at lower interest rate," a senior finance ministry official told ET.
Growth slowed to a decade low of 5% in the year ended March and was at 4.4% in the April-June quarter, belying hopes of a revival. The sectors on the radar, according to the official cited above, are medium and small enterprises, engineering goods and commercial vehicles - areas that, if selectively revived, would encourage more economic activity across the board. The intervention will be focused as a wider spread would run counter to RBI's efforts to check inflation by raising interest rates. Wholesale inflation rose to a six-month high of 6.1% in August while retail inflation is already near double digits.
In the 1970s and 80s, RBI had used selective credit controls to squeeze advances by banks against the hypothecation of certain sensitive commodities such as oilseeds and wheat to contain speculation and inflation.
"A reverse of this mechanism is being looked at to allow flow of credit to select sectors," the official said, adding that the finer details of the mechanism should be ready over the next two weeks.
With growth remaining subdued, there is some stress in the banking segment and paper of such sectors attracts a higher risk premium, pushing up their cost of credit.
The direct intervention by Reserve Bank of India is expected to bring down the risk premium and allow for the flow of funds to these sectors at a reasonable price, seen as having a more beneficial effect than a more diffuse, general interest subvention policy.
Experts said there was a case for such a mechanism but cautioned against so-called evergreening or debt getting rolled over.
"A refinance window like that can provide respite to some sectors, but this should be done cautiously to ensure that it does not encourage structural NPAs (nonperforming assets or bad loans) or evergreening of debt," said Abheek Barua, chief economist, HDFC Bank.
Industry has demanded measures that will lift the country out of the growth crisis. "The real economy is going through one of the most difficult phases in recent history and sustained action from the government and RBI is warranted to get growth back," Chandrajit Banerjee, director-general of the Confederation of Indian Industry (CII), said after the monetary policy announcement on Friday.
Rajan unexpectedly increased repo rates by 25 basis points, citing inflation as the key risk. This is expected to drive up interest rates further in the medium to long term. Finance Minister P Chidambaram, who spearheaded the creation of the Cabinet Committee on Investments as part of efforts aimed at improving sentiment on that front, has already directed banks to ensure the flow of credit to projects that are being fast-tracked through clearances.
The belief in the finance ministry is that all these steps as a whole will help revive growth to upwards of 5.5% in the fiscal.
While new RBI Governor Raghuram Rajan opted to tighten monetary policy on Friday, saying the US Federal Reserve will wind up its bond-buying programme sooner or later, the finance ministry is of the view that a precisely directed stimulus programme will help revive flagging growth without undermining the central bank's inflation focus. One of the options under discussion is for the central bank to set up a special window to buy commercial paper from companies in the chosen sectors at preferential rates.
"A number of options are on the table... we are working on a mechanism that will allow credit to reach some sectors at lower interest rate," a senior finance ministry official told ET.
Growth slowed to a decade low of 5% in the year ended March and was at 4.4% in the April-June quarter, belying hopes of a revival. The sectors on the radar, according to the official cited above, are medium and small enterprises, engineering goods and commercial vehicles - areas that, if selectively revived, would encourage more economic activity across the board. The intervention will be focused as a wider spread would run counter to RBI's efforts to check inflation by raising interest rates. Wholesale inflation rose to a six-month high of 6.1% in August while retail inflation is already near double digits.
In the 1970s and 80s, RBI had used selective credit controls to squeeze advances by banks against the hypothecation of certain sensitive commodities such as oilseeds and wheat to contain speculation and inflation.
"A reverse of this mechanism is being looked at to allow flow of credit to select sectors," the official said, adding that the finer details of the mechanism should be ready over the next two weeks.
With growth remaining subdued, there is some stress in the banking segment and paper of such sectors attracts a higher risk premium, pushing up their cost of credit.
The direct intervention by Reserve Bank of India is expected to bring down the risk premium and allow for the flow of funds to these sectors at a reasonable price, seen as having a more beneficial effect than a more diffuse, general interest subvention policy.
Experts said there was a case for such a mechanism but cautioned against so-called evergreening or debt getting rolled over.
"A refinance window like that can provide respite to some sectors, but this should be done cautiously to ensure that it does not encourage structural NPAs (nonperforming assets or bad loans) or evergreening of debt," said Abheek Barua, chief economist, HDFC Bank.
Industry has demanded measures that will lift the country out of the growth crisis. "The real economy is going through one of the most difficult phases in recent history and sustained action from the government and RBI is warranted to get growth back," Chandrajit Banerjee, director-general of the Confederation of Indian Industry (CII), said after the monetary policy announcement on Friday.
Rajan unexpectedly increased repo rates by 25 basis points, citing inflation as the key risk. This is expected to drive up interest rates further in the medium to long term. Finance Minister P Chidambaram, who spearheaded the creation of the Cabinet Committee on Investments as part of efforts aimed at improving sentiment on that front, has already directed banks to ensure the flow of credit to projects that are being fast-tracked through clearances.
The belief in the finance ministry is that all these steps as a whole will help revive growth to upwards of 5.5% in the fiscal.
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