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Falling inflation, high lending rates ensnare Indian firms

New Delhi

INDIAN businesses are getting squeezed. As economic growth slows and inflation sinks, they have little ability to raise prices without losing sales, and yet they are getting almost no relief from borrowing costs, with lending rates remaining high.

The result: profit margins are getting crushed. And that helps to explain why companies are not confident enough to significantly boost capital spending or hire at a robust pace.

The rise in India's real interest rates - the comparison between the inflation rate and the rate people pay to borrow - will be a major headache for whoever wins India's general election which runs from April 11 to May 19. Prime Minister Narendra Modi and his Bharatiya Janata Party are expected to win a second term.

It is also an immediate problem for the monetary policy committee (MPC) of India's central bank, the Reserve Bank of India (RBI), as it decides whether to cut its official benchmark interest rate, and by how much, at a meeting on Thursday.

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Sudarshan Sareen, president of the All India Manufacturers Organisation, said: "Had the borrowing costs declined by three to four percentage points along with inflation, we would have made investments and created thousands of new jobs."

Indian manufacturers pay 12 to 14 per cent bank lending rates annually, he said, the highest among the emerging market economies. The government pays a subsidy of three to four percentage points to banks to lower the costs for farmers.

The facts are simple. India's retail inflation rate has dropped to below 3 per cent from more than 10 per cent in 2013. In the same six-year period, bank borrowing costs for manufacturers and retailers have declined only marginally - by about one percentage point from more than 13 per cent, business leaders say.

That means real interest rates have gone up in the last five years. Many economists, including Ravinder Dholoakia, a member of the RBI's MPC, have said that real rates in India are too high. REUTERS

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