Mon, Jun 20, 2011 - Page 10 News List

Indian government raises business ire over interest rates


Business leaders in India have rounded on the government, urging a halt to interest rate rises amid fears that inflation and lack of institutional reform could hit investment and cut economic growth.

The Reserve Bank of India hiked rates by a quarter of a percentage point last week — the 10th rise in 16 months and longest streak of monetary tightening in a decade — to battle inflation of more than 9 percent.

“The latest rate hike may not achieve the desired results unless the government comes up with basic reform,” Rajiv Kumar, -secretary-general of the Federation of Indian Chambers of Commerce and Industry, said on Friday.

The president of the Associated Chambers of Commerce and Industry of India, Dilip Modi, warned that “high input prices, rising finance costs and global uncertainties are adding to negative sentiments.”

“A high interest rate environment will most certainly put brakes on new investments,” he said.

India’s government predicts that the economy will grow at between 8.5 percent and 9 percent in the current financial year, but economists are revising estimates downwards to between 7.2 percent and 7.5 percent.

The economy grew 8.5 percent last year.

The negative mood has already had an impact on India’s stock markets and foreign investment.

Shares on the Bombay Stock Exchange have been down for two straight weeks, as domestic concerns combine with wider fears about Greece’s debt crisis to make fund managers cautious.

Global fund managers now consider India to be one of the least-favored investment destinations, according to a recent Bank of America-Merrill Lynch survey.

The country was ranked underweight at -20 percent — its lowest reading in the last six months.

In contrast, India’s great economic rival China is one of the most preferred markets, the study suggested.

“Business confidence in India is low,” said Phani Sekhar, a fund manager with Mumbai-based Angel Broking.

“[The lack of reform] is taking the sheen out of India’s growth story,” said Sonam Udasi, head of research at brokerage IDBI Capital.

Experts say the government has dithered on pending reforms in infrastructure development, retail, banking and the fuel sector.

Meanwhile, inflation — up to 9.06 percent last month and well above the RBI’s “comfort level” of 5 percent to 6 percent — is driving up the cost of funds and risking a delay in investment in key sectors.

The latest interest rate rise comes at a time when fewer cars are being sold, cement sales are slowing and steel imports have dipped.

Economic growth slowed to 7.8 percent in the three months to March — its weakest pace in five quarters — while growth in industrial output in April halved compared with the same period last year.

Udasi said the government’s disinvestment plans are unclear and with fuel subsidy burdens rising, the fiscal deficit target of 4.6 percent looks “grim.”

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