Jan 6, 2004

THE MARKET AND ECONOMIC JUSTICE
INJUSICES IN THE INTEREST RATES MANAGEMENT

The democratic form of Government demands equality and absence of arbitrariness and discrimination in any of the functions of the Government, said the Supreme Court of India in one of its judgments in 1984. However, in the economic affairs in the country in general and interest rates management in particular we clearly find arbitrariness on the part of the government and its officials. Whims and caprices are become more important than the doctrine of equal protection of the Laws.

We have been struggling for social justice for a long time. The “equal justice is an aspect of social justice, the salvation of the very weak and downtrodden, and the methodology for leveling them up to a real, not formal, equality,” said the Supreme Court in another judgment as early as in 1976.

Keeping these two judgments in mind, one can argue the very approach of the market economy which is being pursued by our country, is inequitable. The champions of the market economy say that the prices of the goods and services should be decided by the market forces, which means that the prices should be determined by demand and supply. Its fashionable to say, unless we agree to the fact that the market forces always try to create imbalances in the demand and supply positions for profiteering. They tend to sell their goods and services at much higher rates than their real worth. The recent high level of profits registered in certain corporate companies and banks are mainly due to this phenomenon. Some of the companies are allowed to charge whatever exorbitant price they want from the consumers, in the name of free market. The question is whether it would be wise to allow individuals or companies to charge arbitrarily from the consumers for their goods and services? Moreover, there are different prices set for different set of people! It's simply inequitable. Why should one ignore this and only for the benefit of the rich and not the poor!

Let us take example of our banks and their interest rates. Our policy makers claim that India is moving towards a market driven interest regime. But the claim is baseless one two counts. Firstly, the RBI decides the lending rates policy that is followed by the banking institutions all over the country. It simply means the interest rates are calibrated. Secondly, the interest rates are not increasingly market driven, that is by demand and supply position, but by the whims and caprices of the bankers who actually disburse the lending money to the different sections of people on different written and “unwritten” terms and conditions.

The average prime landing rates of the banks in our country has been brought down from 19 per cent in December 1993 to 12 per cent in December 2002. At present it ranges from 10 to 11 per cent in various banks. One of the logic forwarded by the government for this reduction was that our banks have more cash with them but there is a lack of demand for credit. It seems logical, but the reality is otherwise.

For whom the lending rates were lowered? The answer is simple. For the government and the corporate sectors. The larger share of the borrowings from banks goes to them, and with lower rate of interests they were able to get more benefits. It's simply a politics to ease the burden of the huge fiscal deficits of the government and to enable the big companies to garner more profits. Obviously, both the big corporate houses and the government are clamouring for more reduction in the interest rates. However, it is surprising that both of them never tried to achieve equitable rate for all the classes. The rich can get loan at a much lower rate of interest than the poor.
Now it has become possible for the bigger corporate sector companies to get loans of crores of rupees on a small interest rate of only 6 per cent. They can get loans on easy terms. For example, they can get loans to start their ventures on the land given to them on lease by governments, despite the fact that they are not owners of the said land. Bank loans for them are given on the basis of their balance sheets including their subsidiaries.
The medium and small-scale sector is an important factor in the growth of our economy. It is an open secret that they are starved of funds. For them, getting loan has become more difficult in the present lower interest rates regime than the earlier higher rate regime. Banks and financial institutions are being alleged of refusing loan to them.

But the poorer and downtrodden classes do not enjoy such a privilege. They are asked for their properties as guarantee for loans. Our poorest agrarian class cannot get bank loans on easy terms. If a person is landless, then it is all the more difficult for him to get loans from banks to start his own business. Even if he is given loan, he cannot get it at less than 10 per cent interest. His subsidiary manpowers, which include earning members of his family, are not being considered at all. Government has announced a farm loan up to Rs 50,000 is to be given at the rate of 9 per cent. However, this has not been implemented. Today, a farm loan can be procured at the rate of somewhere between 11 to 13 per cent. This is despite the fact that our economic growth largely depend on agricultural growth that badly need investment which has come down to merely 1.3 per cent of the GDP.

For the middle-class, banks are giving housing loans at the rates of ranging from six to eight per cent. But main beneficiaries of this are urban elites and middle class only, and it makes no difference to the persons living in the hinterland.

Thus we see that interest rates management at present is clearly inequitable and harmful to the economy in general. Wrong priorities led to huge accumulation of NPAs of the banks and financial institutions. Let us give incentive to the poorer classes with offers of easy loans on equitable rates as we give to the rich. It would help increase the credit demand from our banks. We should also keep in mind that the NPAs are the results of giving risky loans to the rich, but not the poor.