One
of the favourite predictions of the proponents of financial liberalisation
measures in the 1990s was that the eventual result of such reforms would
be reductions in real interest rates. It was argued that there would
be an initial rise in such rates to redress the excessively low interest
rates created by policies of "financial repression". In fact
this was argued to be both necessary and welcome because it was supposed
to lead to higher rates of domestic saving as well.
But
thereafter the greater access to capital, especially from international
markets, was supposed to imply that Indian entrepreneurs would face
lower real rates of interest. This in turn would obviously act as a
spur to investment. Thus financial liberalisation was seen as a means
of generating lower real interest rates and higher real investment rates.
But
it turns out that this has not happened. Investment and savings rates
have not increased significantly over the 1990s, nor have real rates
of interest gone down over the course of the decade. Nominal interest
rates have fallen, but real interest rates have shown no such tendency
and have in fact risen quite sharply from the middle of the decade,
to levels well in excess of 8 per cent. This is clear from Table 1,
which shows the movement the State Bank of India's Advance Rate. The
real interest rate is that minus the rate of change in the Wholesale
Price Index. (The other nominal interest rates facing entrepreneurs,
such as the term lending rates of the non-bank financial institutions,
tend to be substantially higher.)
Table
1 : Nominal and real rates of interest
|
Nominal
and real interest rates
|
|
|
SBI
adv rate
|
Real
rate
|
|
1990-91
|
16.5
|
6.2
|
|
1991-92
|
16.5
|
2.8
|
|
1992-93
|
19
|
8.9
|
|
1993-94
|
19
|
10.7
|
|
1994-95
|
15
|
2.5
|
|
1995-96
|
16.5
|
8.4
|
|
1996-97
|
14.5
|
10
|
|
1997-98
|
14
|
9.6
|
|
1998-99
|
14
|
8.1
|
|
1999-00
|
12
|
8.7
|
Clearly,
this is something which requires explanation. Even if the very optimistic
argument of the liberalisers concerning the effect of capital inflows
on domestic real interest rates were not accepted, there would still
have been some expectation that access to more forms of capital would
have meant some decline in real interest rates for domestic investors.
The apparent imperviousness of real interest rates to any such pressure
therefore deserves much closer consideration.
One
of the arguments that has recently gained a lot of attention, and is
increasingly cited by a number of proponents of the financial sector
reforms, relates to the fact that small savings by households constitute
an important part of the overall savings in the economy. According to
this argument, the Government, in order to attract small savings in
the form of Public Provident Fund, Post Office deposits, National Savings
Schemes and other such schemes to finance its own expenditure, has kept
interest rates on such schemes relatively high.
