I have to disagree with two of A V Rajwade’s comments in his column “Interest rates and Malthus’ prediction” (January 24).
First, the Reserve Bank of India’s (RBI’s) hesitation in raising interest rates is surely what permits traders to get cheap money to “hoard” commodities that have short cycles of supply and steady demand leading to short price peaks and troughs. The recent growth in bank lending may well be proof of this, although no break-up is available of credit to the trade versus credit to industry. The latter (industrial credit), in any case, has been largely supplanted by other financial instruments including commercial paper, non-convertible debentures of more than 18 months duration and overseas commercial borrowing as low spreads over Libor and falling credit default spreads have encouraged it. K V Kamath has repeatedly commented in recent years on how industry is using non-bank sources for their credit requirements in an increasing manner. In view of this, to emphasise supply constraints alone (real but irrelevant in the short term) is giving fuel to the RBI to continue with timid rises in interest rates and thus raising inflationary expectations.
Second, much has been made by others, and now by Rajwade, about the role of foreign direct investment in retail trade as a way of building the supply chain infrastructure. I am unable to understand why the Indian biggies in the organised retail trade like Reliance, Bharti and A V Birla can raise billions of dollars and rupees for overseas acquisitions but are capital short to build this supply chain infrastructure for agri-produce in India. Why must we wait for the Great White Hope to do this for us? Surely the problem lies elsewhere, like in the obsolete APMC law, which creates trader cartels, the under-the-handkerchief trading that prevents true price discovery, bans on contract farming (legal and informal), bans on corporate farming, low productivity and so on.
Prakash Hebalkar, on email
Readers should write to:
The Editor, Business Standard, Nehru House,
4, Bahadur Shah Zafar Marg, New Delhi 110 002,
Fax: (011) 23720201; letters@bsmail.in