Wednesday, December 20, 2006

Interest rates likely to go up further

New Delhi: If the government's mid-term review of the economy is an indication of its future strategy, then it's time to brace for further increase in interest rates and losing a few more bucks, thanks to the Centre's intent to prune tax exemptions.
There's a third shocker too, which the 68-page report tabled in Parliament talks about --changes in the subsidy regime, especially for food and cooking gas and kerosene -- but given the political opposition to the proposal, officials and economists say the chances are limited. Ditto for tax breaks on savings instruments but possibility of further increase in EMIs (equated monthly instalments) appears more realistic if the demand for loans does not taper off in the coming months and inflationary pressures continue.
The mid-term appraisal's emphasis on taking preemptive measures in response to inflationary pressures is what has prompted economists to say that monetary tightening exercise, through rate hikes, was not over yet.
Inflation — partly due to poor food production, and therefore supply, and the continued growth momentum — seems to be the biggest cause for concern in an otherwise rosy scene painted by finance minister P Chidambaram. At the same time, the government has tried to dispel the notion that the price rise is unprecedented. It has culled out data in an attempt to show that inflation was actually higher for most segments during the last fiscal. While the other alarm bells are largely predictable — agriculture and infrastructure (especially electricity) — low growth in labour-intensive sectors like leather, paper and food products, which have not kept pace with other industrial segments, is being articulated for the first time and at a time when the government expects a further period of sustained boom.
The mid-term review has used strong demand for capital goods and investment intentions rising 57% between between 2005 and October 2006 to predict that the period of high growth in the manufacturing sector, which started in 2004, is far from over.
The government has used this to make a case for reviewing inflexible labour laws as one major area of reform besides pushing the case for changing the rules of the game for banking, insurance and pension, where legislative changes have been held up due to opposition from the Left.

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