India is working to have sovereign benchmark like London interbank offered rate (Libor) by this September, which would make external borrowing easier for India Inc. The country does not have such a benchmark, which some advanced economies have. This would help reduce cost of capital, feels Sanjiv Sanyal, the principal economic adviser of Union ministry of finance.
"The sovereign benchmark will be useful for raising borrowings abroad and it will be announced later in the year by the government", Sanyal told reporters on the sidelines of annual general meeting of the Indian Chamber of Commerce.
Sanyal made it clear that in order to achieve an investment level of 35% of GDP, the cost of capital has to be brought down. “The investment architecture has to be changed. We know that inflation rate five-six years back was 8-10% which has come down to 3-4% in last five years. So, there has been 600 basis points decline in inflation but lending rate has not come down to that extent and as a result real lending rate has actually gone up,” he said.
Sanyal pointed out that even good companies are borrowing at 10%. According to him, primary deficit of the government is only 0.3% and 90% of the fiscal deficit is due to the interest payment and this is the problem of both government and corporate. Sanyal also feels that the spread between deposit and lending rate is very high in India and that is because of inefficiency and high provisioning.
