Lemon & Ice

Rising rates are beginning to pinch

Inflation in India has been hovering around 5.5% to 6% mark for a couple of years and it's been giving Mr Y.V. Reddy (RBI Governor) some very sleepless nights. While we have been crowing about our amazing 9.5% GDP growth rate in recent months, the flip side has been rising inflation, which can become chronic if not attacked vigorously. Mr Reddy has been raising interest rates steadily over the last year and half, and now they have reached levels that are beginning to hurt the common man. The RBI is pursuing a medium term inflationary target of 4% to 4.5% and a sustainable GDP growth rate of 7% to 7.5%.Somehow, this reality has not registered with investors and corporates alike who still religiously believe we will continue to grow at 8.5-10% for the next few decades. Let me share a sampling of borrowing rates in India to drive home my point.

When I arrived here last year, I looked at financing options for buying a home and a car. I found that the rates were a bit rich at 8.5% for a home loan and 10.5% for a car. Since then, rates have gone up by almost 25%-30%! The cost of home loans in India has shot up from a low of 7.5% in Sep 2004 to 11.5%-12% now (on 20 year loans). Car loans now cost 15% (for 5 year loans).

The quest for 'All-Inclusive' growth

In India, it still matters what kind of family you were born into into. India's left leaning parties have arm-twisted the government to introduce legislation that will reserve up to 49.5% of the class size at India's top state funded schools (like the IITs) for those who belong to the 'OBC' (Other Backward Class) section of Indian society. OBCs constitute over 50% of the population. The Indian government has already reserved 22.5% of the seats in the top state schools for 'SC/STs' (Scheduled Caste and Scheudled Tribes who constitute about 25% of Indian population). In addition, the commerce minister wants to introduce affirmative action in private industry as well. There is a huge uproar about this impending legislation in the media and the student population. Even as I write this, there are widespread reports of student protests and police brutality filtering in through TV news channels.

India's top schools are notoriously hard to get into with acceptance ratios averaging 1% and now these are set to shrink to 0.5% (for non-quota students). Apart from anxious parents and students, India Inc. has openly expressed fears that such legislation will hit India's competitiveness. Even as one hand of the Indian government goes about dismantling antiquated laws restricting businesses, the other is busy conjuring up new laws that will make India less competitive. It's no secret that the left wing parties in India are finally moving to the center stage in national politics and I have to say that this is bad news in the medium to long term. Unless, this proposal is a compromise reached by the ruling party to continue the passage of economic reforms, we could see a further slowdown of much needed reforms in the Indian economy.