|Can't bank on a good report|
|Friday, 20 April 2012 00:00|
4 arbitrations and now the mess on bank lending
As the Prime Minister's Office (PMO) rustles to get ministries to give it data on what they've done for the UPA's third anniversary report in May, you can expect to get the usual laundry list of achievements. So there will be the rescue package for Air India, the presidential directive to Coal India to sign fuel agreements for 50,000 MW of power, the movement towards the Food Security Bill, hiking MGNREGA wages … perhaps even providing clarity to tax law (the finance ministry did argue this) by bringing in a retrospective amendment going all the way back to 1962?! And now, to top it all, getting banks to lower interest rates can be added to that list—rarely, if ever, have banks responded so fast to rate cuts by RBI and lowered rates within a day.
What the UPA thinks is worthy of a good mark, however, isn't necessarily what others feel. Pressuring banks to cut lending rates will cause a problem on several fronts. For one, banks will take a hit on all loans (base rates are being cut 25 bps) while it will take 1-2 years to be able to get savings from lower interest rates on term deposits (17% of all term deposits have a tenure of less than 1 year, and 22% of 1-2 year tenure). Two, as our lead column (Cheaper rates, lesser loans) points out, if people start saving less with deposit rates falling (a possibility with high inflation and a sluggish economy), this will lower the ability of banks to lend.
As to other achievements, there is little doubt UIDAI is one of them, as is the progress on setting up the GST portal, the higher speed of giving out road contracts by NHAI and the possibility that foreign airlines may finally be allowed to invest in India. The Food Security Bill, however, is quite problematic and will add 1.5% of GDP to the subsidy bill. The R30,000 crore bailout for Air India is rank populism, especially when there is little guarantee the airline will turn around. What puts all of this in the shade, of course, is the retrospective taxation and the impact it has had on investor sentiment—counting Reliance, a total of four companies are in the process of taking the government to arbitration court! It is true, as some newspapers reported, the BJP is likely to help pass the pension bill, but with the bill capping FDI at 26%, where's the reform? Chief Economic Advisor Kaushik Basu confirmed this when he told the Carnegie Endowment, in Washington on Thursday, that economic reforms had slowed and would pick up only after the general elections.