When Media Covers Economics, Simple Becomes Simplistic


If front pages of the so-called national newspapers published out of Delhi are to be believed, all is not well between the Reserve Bank of India (RBI) and the ministry of finance. The ministry of finance wants the RBI to cut interest rates and the RBI is not in the mood to do so.

The impression that is created by such newsreports is that interest rates are holding back economic growth. If interest rates were to be cut, consumers would borrow and spend more, and at the same time corporates would borrow more and expand their businesses.
This sounds very simple and straightforward. As Julia Shaw writes in The Memory Illusion: “For our work to carry significance, we must be able to explain it simply.”

Nowhere, does this apply more than in the media, be it newspapers, websites or television. The effort is always to make things as readable and as understandable as possible for the audience.

In doing so, the nuances get lost. While the idea is to make things simple, they end up becoming simplistic. As Shaw writes: “When I explain concepts by using analogies, stories or simplifications, I always risk losing some of the nuances of the inherently complex issues under discussion.”

Lower interest rates leading to greater lending and in turn economic growth is one such thing. Since the beginning of January 2015, interest rates have been on their way down, but that hasn’t led to increased lending, as theoretically it should have.

In 2016-2017, the total fresh lending carried out by banks stood at 44 per cent of the total fresh lending carried out by banks in 2015-2016. This, even though interest rates at which banks lent in 2016-2017 were lower than the interest rates in 2015-2016.
So, what happened here? Bank lending to corporates contracted in 2016-2017.

This basically means that overall, banks did not make any fresh loans to corporates in 2016-2017. Corporates have defaulted on a significant portion of the bank loans they had taken on in the past. Given this, banks are not in the mood to lend to corporates.

Over and above this, the good corporates who have not defaulted on loans and are in a position to repay, are not in a mood to borrow from banks. In some cases, this is because there are other cheaper modes of finance available. And in some other cases, this is because of the simple fact that the current operations of the corporates are producing enough to meet the market demand. Hence, lower interest rates do not help. Corporates borrow when there is a need to borrow.

Now take the case of home loans. Between 2014-2015 and 2015-2016, fresh home loans given by banks fell by around 10 per cent. This jumped up by more than 25 per cent between 2015-2016 and 2016-2017. What happened here? Of course, lower interest rates helped to some extent. But what also helped where the government sops on home loan interest rates, as well as falling real estate prices in large parts of the country.

All this nuance goes missing, when an impression is created that lower interest rates lead to greater borrowing, which in turn leads to higher economic growth. As we have seen here that is clearly is not the case. As John Kenneth Galbraith points out in The Economics of Innocent Fraud: “Business firms borrow when they can make money and not because interest rates are low.”

Along similar lines, individuals borrow when they feel confident of being able to repay the EMI. This is not to say that lower interest rates do not lead to increased borrowing, but the truth is not as simple as that.

Also, none of these newsreports, bother to take into account the fact that people save a lot of their money using fixed deposits. And if interest rates on fixed deposits go down, it impacts the savings plans of many people. What about that?

The piece originally appeared in the Bangalore Mirror on June 14, 2017