ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

A+| A| A-

Will Interest Rate Cut Work?

Budget 2001-2002 suggests a shift towards monetary policy in reviving an economic downturn, as in advanced economies like the US and Germany. In principle, there is nothing wrong in the use of monetary policy rather than fiscal policy, as the former has shorter lags. The question however is whether the link between investment and interest rates is as tight in India. The second point is the fast disappearing role of public investment as a tool to spur private investment.

The 1.5 per cent cut in the small savings deposits like national savings certificates, public provident funds and all other post office schemes in this years budget is not surprising in the light of what the Economic Survey had to say on the issue a week before the budget. In its overall survey of the economy, the Survey concluded that sustained economic growth would require a significant improvement in investment, which in turn would depend on (amongst other things), structural reduction in inflationary expectations and real interest rates... Elsewhere, the Survey stresses the ...importance of lower real interest rates in accelerating industrial growth and boosting Indias competitiveness abroad...

There is no doubt therefore that what is expected of the interest rate cut is a boost to investment. This suggests a shift towards monetary policy in reviving an economic downturn, as in advanced economies like the US and Germany. In principle, there is nothing wrong in the use of monetary policy rather than fiscal policy, as the former has shorter lags. The question however is whether the link between investment and interest rates is as tight in India. The second point is the fast disappearing role of public investment as a tool to spur private investment.

Dear Reader,

To continue reading, become a subscriber.

Explore our attractive subscription offers.

Click here

Or

To gain instant access to this article (download).


Pay
INR 59

(Readers in India)


Pay
$ 6

(Readers outside India)

Support Us

Your Support will ensure EPW’s financial viability and sustainability.

The EPW produces independent and public-spirited scholarship and analyses of contemporary affairs every week. EPW is one of the few publications that keep alive the spirit of intellectual inquiry in the Indian media.

Often described as a publication with a “social conscience,” EPW has never shied away from taking strong editorial positions. Our publication is free from political pressure, or commercial interests. Our editorial independence is our pride.

We rely on your support to continue the endeavour of highlighting the challenges faced by the disadvantaged, writings from the margins, and scholarship on the most pertinent issues that concern contemporary Indian society.

Every contribution is valuable for our future.