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Banks to offer cheap loans for bikes, fridges

By Reuters

  • 03 Oct 2013
Banks to offer cheap loans for bikes, fridges

Indian banks will offer cheaper loans to stimulate demand for two-wheelers and other consumer durables as Finance Minister P. Chidambaram tries to pull the economy out of the worst slowdown in a decade ahead of national elections due by next May.

Banks will get additional capital to carry out the plan, the finance ministry said in a statement on Wednesday after a meeting between Chidambaram and new Reserve Bank of India (RBI) chief Raghuram Rajan.

The move comes at a time when persistently high inflation coupled with shrinking employment opportunities in a slowing economy have crimped consumer demand.

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Growth in consumer spending slowed down to 1.6 per cent year-on-year in the quarter through June from 4.3 per cent a year earlier, dragging down economic growth for the quarter to a near four year low of 4.4 per cent.

"While this will bring relief to consumers, especially the middle class, it is also expected to give a boost to capacity addition, employment and production," the ministry said in a statement.

Unlike China, India is largely a domestic demand-driven economy. Robust consumer demand helped shield the economy from the worst of the global financial crisis in 2008.

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The move is expected to boost the production of consumer durables items such as two-wheelers, refrigerators, washing machines and televisions, which has been hit by high interest rates and inflation. The sector has failed to register growth since last November.

"It is a short-term measure and can help to boost demand for the consumer durables and auto sector," said N.R. Bhanumurthy, an economist at National Institute of Public Finance and Policy (NIP), a Delhi-based think tank.

India's worsening economic slowdown is a major worry for Prime Minister Manmohan Singh's government as it seeks a third straight term in upcoming national elections.

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Economic growth virtually halved in two years to 5 per cent in the fiscal year that ended in this March - the lowest level in a decade - and some economists expect growth in 2013/14 to hit the lowest level since 1991/92.

That is nowhere near good enough for a country with India's demographics. It has a population of 1.2 billion and a per capita income of around $1,000.

Singh's government estimates the economy needs to be averaging 8 per cent growth to generate jobs for the increasing numbers of youth joining the workforce.

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The downturn has hurt the reputation of Singh, who was once hailed for unleashing the unprecedented economic boom of the past two decades. It has also allowed Narendra Modi-led opposition Bharatiya Janata Party (BJP) to gain momentum ahead of national elections.

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