Govt working on industry concerns at rising interest rates

The Government today assured the industry that it is contemplating steps to tackle the problem of rising interest rates, which have dragged the industrial growth rate to a nine-month low of 5.6% in May.

"I am concerned about the cost of credit for exporters and industry. I already have had a meeting with the Finance Minister and we are addressing it," Commerce and Industry Minister Anand Sharma told reporters here after a meeting with industry chamber Ficci's members.

The Minister said he is engaged with the Finance Ministry on seeking remedial measures to handle this issue.

Sharma today held a review meeting with senior members of the Ficci. A similar exercise was held yesterday with another leading industry chamber CII.

The industry has raised issues like demand compression because of high interest rates, which are also having an adverse impact on the capacity addition.

The Reserve Bank has raised benchmark interest rates by 250 basis points (2.5 percentage points) since March 2010 to tame inflation.

The decision to engage with the industry comes after official data pointed to dismal performance of the industry, affected by a lower rate of expansion in manufacturing sector at 5.6% in May from 8.9% in year-ago period.

He stressed that interventions should be made before perception of slowdown aggravates further.

Ficci vice-president and HSBC country head Naina Lal Kidwai, who was there in the meeting, said rising interest rates would impact long-term investments.

Sharma said time has come for industry and the government to work together to change perception and "also bring a turn around as far as industrial production is concerned".

He said that there was a need to take "steps and measures to see that India continues to remain an attractive destination for investment".

The industry also raised concerns with regard to high credit cost, investment slow-down, skill shortage, high input cost, hurdles in getting various clearances and environmental bottlenecks.

"They called for galvanising long-term debt market and address the labour market rigidities. They also asked for broadening of definition of infrastructure to bring in more areas for tax and other benefits," the ministry statement said.

On the proposed National Manufacturing Policy, he said that the policy was inevitable now and states should be ready to benefit from it. In fact, Rajasthan, Maharashtra and Gujarat are already gearing up for the proposed National Manufacturing and Investment Zones, he added.

Kidwai said high interest rate scenario will hurt industry in the long run and investment could be impacted.

"The problem right now is that we have many issues which needs tackling. Biggest of them is perception that we are difficult as a country to do business in and unless we solve that we don't get interest for offshore investments. Our own industry hesitates to move forward," she said.

On rates outlook, she said, "interest rates will go up, likely by 25 basis points. It is peaking, it is towards the end".

The RBI is coming up with first quarterly review of the credit policy for 2011-12 on July 26.

In its mid-quarterly review last month, the RBI hiked its key short-term lending and borrowing rates by 25 basis points (0.25%) each with immediate effect to tackle inflation.

The short-term lending (repo) rate now stands at 7.5% and the borrowing (reverse repo) rate at 6.5%.