RBI tells firms to shift to floating interest debt

MUMBAI: The Reserve Bank of India has a word of advice for Corporate India: shift from fixed to floating interest rate debts. It even has a red alert for the Centre: the widening fiscal deficit is coming in the way of maintaining the current soft interest rate regime.
The government, reeling under fiscal deficit, must quicken PSU divestment, slash subsidies which don''t benefit the poor, tax more services and put a cess on corporates to create a safety net so that labour laws can become more flexible.
Underscoring these in its ‘Report on Currency & Finance 2001-02,'' the RBI has voiced concern over corporates'' "high-cost leveraged funds" — a result of the lull in the stock market. There is a "debt overhang", it warns.
The central bank has indicated that unless the government generates resources on a war footing and invests in infrastructure, the country will miss the 8% growth target for the Tenth Plan period (‘02-07).
Because, "convergence calculations suggest that India will take decades to catch up with the middle income emerging market economies".
It points to the CSO estimate of real GDP growth for ‘02-03 at 4.4%. According to the latest CSO figures, the economy grew at 2.6% in the third quarter compared to 6.3% in the corresponding period last year.
The central bank has been unusually vocal in building a case for PSU divestment. "The return on the investment in these units do not cover even the cost of borrowed funds invested by the government... aggregate profitability is misleading since it includes state oil and petroleum monopolies," says the RBI report.
It''s equally hash on subsidies: "...the argument that subsidies are meant for the poor has little basis in practice. The better off sections of society consume more of such services," says the RBI, quoting a study.
Pointing out that the "proportion of interest to total costs for Indian corporates is among the highest in emerging market economies," RBI says, "The possibility of changing terms of borrowing from fixed to floating interest rates could thus be beneficial for corporates."
The Centre can tap resources by "rationalising user charges" on services like power, road and transport.
All the more because there is "concern over the medium term growth sustainability of the services sector", which has strong linkages to commodity producing sectors. An 8% growth would call for raising the average rate of investment by 4%, which has to come by and large from the public sector.
In fact, some of reform suggestions are radical. While advocating a safety net and attractive VRS, the report says prior permission for closure of a unit may be waived. Moreover, as liberalisation pushes up wages in competitive sectors that attract capital, the "preferred strategy would be to redeploy surplus labour from the public sector to more productive sectors."