CII announces 5 point agenda on economy

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The current global financial situation mandates some pro active confidence building measures to be taken locally, to ensure that India remains insulated from the meltdown, CII has said in a statement issued here today.

CII said that inflation is coming under control. The Government measures have been appropriate in containing the inflation. However, the weakening of the Exchange Rate is a major concern. A steadier exchange rate and strengthening of the rupee at this point would be helpful.

The CII Director General, Mr Chandrajit Banerjee said "CII was agreed with the Finance Minister in terms of the outlook towards the Indian Economy, and believes that the economy had strong fundamentals, however, some pro active actions are required to keep the momentum positive, and these would involve deeper cuts in CRR and the repo rates in order to inject liquidity into the system, creating a fund for supporting the capital markets; raising the interest rates on NRI deposits and easing of the ECB norms" .

To this end, CII's five point agenda includes:

First, while the 50 bps CRR cut by the RBI announced on 6^th October 2008 is welcome, what is required is a deeper cut in the order of another 150 bps to inject the necessary liquidity in the system. What the system needs today is about Rs. 100,000 crore of liquidity to be pumped in, CII said and therefore, the CRR should be accompanied by other measures such as immediate unwinding of MSS bonds held by RBI.

Second, the inflation trend is downward and therefore, it is time that the RBI also starts considering an interest rate cut, CII has suggested to the Central Bank. A cut in the repo rates by 50 bps would be very effective at this stage.

Third, the government may also consider setting up an exclusive fund for creating liquidity in the capital market, the CII recommendations went on to say. This can be created from RBI's foreign exchange reserves that will invest in Indian securities. This will have the benefit of creating a floor for asset prices and preventing further depreciation in the rupee. This fund will ultimately make a profit as Indian asset prices are likely to increase in the longer term. The size of the fund should be at least US$ 7-8 billion.  

Fourth, raise the interest rate on NRI deposits and if required the government/ RBI could plan something similar to the India Millennium Deposits or the Resurgent India Bonds. These were special deposits for non-resident Indians with returns higher than that available elsewhere. This would also enhance the dollar inflow and help check the slide of the Rupee, the CII release said.

Fifth, the other key initiative that needs to be taken with urgency is that of easing up the ECB caps. CII has said that while the recent relaxations of ECB guidelines for companies in the infrastructure sector (including the inclusion of the mining, exploration and refining sectors under infrastructure) are welcome, the government must allow all companies that are investing in new capacities to access foreign debt. This will allow some large projects to get funded at slightly better terms than the current cost in India as the Indian cost of funds is turning many projects unviable. CII's suggestions in this context include:

·         All projects with cost in excess of $ 500 Million should be allowed to borrow up to $150 Million for meeting Rupee capital expenditure;

·         Import of Services upto $100 million in a year should be allowed using ECBs. Services would include those related to R&D, new product development, license fees, technology fees, etc.

·         The maximum spreads currently allowed do not match up to the market rate at which loans are available. The RBI should take into account the recent hardening of LIBOR and increase the spreads accordingly.

The CII release went on to say that while the rest of the world affected by the crisis has paid the penalty of reactive policies, it is imperative that the policy makers in India take a pro active position on these issues and ensure that India remains an island of stability even as the financial meltdown unfolds in the world outside.  

Sourced From: Confederation of Indian Industry