Interest rates prevailing in an Economy determines the competitiveness of a Country, Companies and the purchasing power of Individuals. Low interest rates in an Economy provides a conducive climate for the growth of an Economy.
In India , lowest interest on any product or service is the Current account offered by banks , where there is no interest. On the other extreme, the people who borrow small sums on a daily basis pay up to Rs.10 on Rs.90 borrowed, which works out to more than 4000% interest per annum. The interest rate in the Economy ranges from 0 % to 4000%.
The rate of interest by itself does not decide the competitiveness of different customer segments in the society but it is the particular segments’ affordability to pay the interest charged determines the competitiveness.
The starting point of high Economic growth was the steps taken by government in liberalizing the economy but this gained momentum when a private bank started offering low interest rates to various segments of its customers. When the loans became affordable, various customer segments started availing the loans for investment and consumption needs. This gave a big fillip to the economic growth. Then we witnessed a very low interest rate environment in the Economy as a whole which has also stimulated the consumer boom in the country.
The IT has enabled the banks in the country to penetrate the rural areas and offer affordable interest rates to the rural population. In many areas, where the banking penetration has improved the quality of life has improved for many people they were able to start and run viable rural enterprises. This is one of the main reasons why demand in rural areas continue to be strong. When we visit our villages today, we witnessed a sea change.
There is a need to keep the interest rates at a low level in the Economy so that the potential for higher growth can be realized to the full extent. The low interest rates increases the affordability and purchasing power resulting in higher economic growth.\
Benefits to the Government :
Government is the largest borrower in the Economy. The low interest rates help to reduce the interest expenditure for the government . This results in lowering the fiscal deficit and the need for additional borrowing and increasing the sources of other revenue. Low interest rates help the government to manage the fiscal position of the economy better and keep the tax levels in the Economy lower. Lower taxes in the Economy also helps to improve the competitiveness of enterprises.
Benefits to the Corporates :
Corporates in Government/Private sector borrow for Working capital and projects. The interest component for corporates on the total income today stands at more than 10% of the income . Any further increase from the present levels will affect the viability of enterprises in a big way. The impact will be more in project related activities of corporates , especially when they implement long gestation projects. In such cases, they have to capitalise the interest which increases the overall cost of the projects , thereby affecting the overall project viability.
Benefits to the individual customers :
The low interest rates and the concept of EMI has changed the customer behaviour in the Indian Economy in the last few year. Most of the individual customers buy homes, cars and consumer durables on EMI basis. A small change in interest rate , makes a big difference in EMIs as well as the tenure of repayment. This in turn affects the affordability of individual consumers. If interest rates are at a high level many of the individuals lose an opportunity to buy many of these products which in turn affects the demand for these products.
By keeping the interest rates low, all the sections of the society benefit immensely and there is a strong case for keeping the interest rates at a very low level in the Economy. The concerns regarding inflation are well justified but by managing the demand supply situation for products and services inflation can be kept at manageable levels in the Economy. By focusing on demand , supply and reducing the mismatch in demand supply, we can have low interest rates, moderate inflation and higher economic growth.
