Auto Loans! Dime a Thousand Dollars!

Auto Loans! Dime a Thousand Dollars!

Ganga Prasad G. Rao
http://myprofile.cos.com/gangar



7 years after returning to India, I am still getting used to the way in which policies are set in this country. Recently, I read that the Honorable FM exhorted PSU banks to find ways to lower the interest rate on loans. Specifically, he sought lower interest rates to stimulate the auto sector growing at less than the 'target' rate. That got my old moth-balled brain whirring. Isn't that what the doctor ordered for our beleaguered transport sector? Apparently, what we need is not investment in good roads, road-widening and flyovers, more buses, an MRTS or a better traffic management, but more vehicles on the road. More vehicles for urban traffic that moves at a snail's pace negotiating congestion and snarls. More cars, more smoke-belching RAVs, more vans and more trucks on narrow roads getting narrower by the day. Wonder what motivated the FM's request. Does the Government's IO model reveal new vehicle purchases as the best means to increase the GDP? Perhaps it the best means to couch the increase in CO2 emissions required to accept a baseline emissions in a global warming treaty? If so, the minister figures it right that reducing the interest rate charged by banks is the appropriate policy prescription. After all, the upfront fixed cost is the largest obstacle to purchasing vehicles. And if banks can lower the interest rate on loans to an extent that large, smoke-belching vehicles are affordable even to the clerk scrutinizing the loan document, then that must herald good times in the stock market to those invested in the auto and the steel sector. Right?

Wrong. Aren't we doing exactly the opposite of what we should be? Shouldn't our focus be on infrastructure first? Shouldn't infrastructure projects qualify for the lowest interest rate? And even we do wish to lend money for vehicle purchases, shouldn't we price in the externalities caused by vehicles, if not in 'time of day' road pricing and emissions taxes, then in loans rates? Shouldn't loan rates vary with the emissions performance or the size (and fuel) of the vehicle? Personally, and I suspect many among us, would either defer the purchase or buy a smaller (cleaner) vehicle if the loan rate were 20% instead of 10%. And banks would have more money to divert to transport infrastructure projects at lower interest rates. Wider roads, flyovers and an MRTS. Faster traffic and cleaner air. Now that make a big difference to urban congestion and air quality.

And, I suspect, to the GDP as well, if only years later.