Anand Sharma roots for easy money policy

Commerce and industry minister Anand Sharma has dashed off a letter to finance minister Pranab Mukherjee urging him to ensure that the Reserve Bank of India (RBI) does not hike interest rates, as this would raise the cost of credit at a time when industrial growth slumped to an 18-month low of 2.7 per cent during November.

Sharma has expressed the fear that in case the central bank raises interest rates to rein in inflation at its review of the credit policy on January 25, the industrial growth rate would be choked further.

While the RBI enjoys autonomy over the country's monetary policy, it works in close sync with the finance ministry and Sharma is banking on this to keep easy money flowing to industry.

The industry minister has pointed out that the high inflation in primary articles, particularly vegetables, is more on account of supply-side constraints and monetary policy may not be the most suitable tool of intervention to deal with the situation.

"A selective restriction in credit may be necessary to check inflationary pressures, but the imperative of easy credit flow for the industrial sector, especially infrastructure and manufacturing, is crucial for the economy," Sharma states.

While he appreciated the concerns on inflation, the minister said, the industrial sector clearly needs sustained support to enable a complete recovery.

The minister has voiced his concern at a time when it is widely expected that the RBI will go in for a 0.25 per cent hike in key rates. The central bank already has raised short-term rates six times over the last year to check inflation. RBI governor D. Subbarao has said that he needs to control inflation and support industrial growth.

High food inflation has been a major concern for the government. Rising food prices have pushed up inflation to 8.43 per cent in December last year. Food inflation stood at a high level of 16.91 per cent in the first week of January, after touching 18.32 per cent in the last week of December 2010.

Sharma has highlighted the fact that investment has not taken place in the economy at an appropriate level to ensure the sustained targeted growth in gross domestic product (GDP).

The government is expecting that the country's economy would grow by 8.75 per cent in the current financial year. "The capacity addition has been much below the 11th Plan targets in power, roads and other infrastructure sectors," Sharma has observed.

He has further buttressed his case for an easy money policy by stating that "an analysis of data indicates that inflation in manufactured items is moderate, averaging 4.7 per cent in the last four months, despite an increase in global commodity prices".

Meanwhile Pranab Mukherjee on Tuesday held a meeting with bankers and other financial sector representatives to get their inputs for the Union budget 2011-12 on issues related to banking, capital markets, insurance, infrastructure finance, rural credit, housing finance and micro-finance.

The finance minister said at the meeting that the cost of banking intermediaries in India is high and bank penetration is limited to only a few customer segments and geographies. He said that the government is trying to address this in collaboration with the RBI, but much more is needed to be done.

Those who attended the meeting include SBI chief O. P. Bhatt, Punjab National Bank chairman K. R. Kamath, Arun Kaul from UCO Bank, R. V. Verma from National Housing Bank, Rakesh Singh from NABARD and Uday Kotak from Mahindra Bank Ltd.

Courtesy: Mail Today