Interest rate reduction - a myth
A lot has been written about the impact of interest rate reduction on growth. I think the noise is a result of a mis-understanding of basics. Economic growth is an extension of demand generation. A project's viability depends on whether the goods produced can be sold, and of course at what cost. While computing the cost of goods for the manufacturer, interest component plays a much smaller role as compared to other costs viz. raw material, labour, fuel etc etc If the cost is 100, raw material may be 70 %, labour may be 5 %, power and fuel may be 5 % and other manufacturing costs may contribute another 5%. Suppose the financial costs are also 5 % of total costs, a reduction in 1 % in the interest cost may result in saving of 0.40 % to 0.45 % app. Though this may add to the profits of the manufacturer, it definitely cannot be the guiding factor for the manufacturer to decide as to whether the project per se should be established or not. Therefore to say that a reduction in interest ...