“Unless the prime lending rates are cut down by the banks, it would be difficult to achieve the revival of the Indian economy.” Give arguments For and Against this view.
During the last almost one year now, the Indian economy has been experiencing economic slowdown, thanks to the sub-prime crisis of the United States. Indian economy has been experiencing a very peculiar phenomenon where the inflation rate is high but, at the same time, the interest rates are also very high. It is paradoxical to have high interest rates with low liquidity. In fact, high interest rates are adopted to reduce the availability of cash liquidity in the economic system. Many feel that unless the lending rates were cut, the revival of the economy may be difficult.
Arguments For the View
(a) Higher lending rates in any economy deter economic activity, as the higher cost of capital requires higher rate of return, which is difficult to be obtained at a time when the world economy is experiencing recession.
(b) Rate cut by the RBI as well as by the banks would reduce the cost of capital and even those projects which were having lower rate of return would become economically viable and the economic activity would pick up.
(c) High lending rates are generally accompanied by higher deposit rates in the economy. High deposit rates encourage higher savings rather than higher investment.
(d) Historically, all the developed countries have lower interest rates. It is one of the undeclared pre-condition for rapid growth of any country. No country can grow faster with higher interest rates.
Arguments Against the view
(a) It is wrong to say that the Indian economy is experiencing any type of slowdown. There has been minor impact of the global developments resulting in reducing of the expected growth rate to around 7 per cent, which by no standards can be termed as low.
(b) The world economy is undergoing the recessionary phase at present, which developments may impact the pace of development in the country only to some extent.
(c) Economic situation in the country at present is complex and it would be wrong to blame only the higher prime lending rates. There are many other factors in the market which need to be attended.
(d) Along with the cut in the lending rates, the government is required to take several other measures like adoption of pro-active monetary policy, effecting the credit control measures and other economic policy measures. Cutting the lending rates itself may not actually help. It is wrong to say that unless the prime lending rates are cut down by the government, Indian economy would not revive.