'Government needs to cut interest rates for an economic turnaround'

Government must The earlier option of easy money from stock markets is just not there. contain expenditure, increase investments in infrastructure, reduce interest rates and substantially deregulate to achieve fiscal targets and boost growth.Click here to EnlargeYou could say that Palaniappan Chidambaram is poised on the brink just this side of fiscal hell, and just that much away from not exactly heaven but an economy on the rails. If the second works, the sainthood bestowed by one segment could well mean hell from the other - mostly his political allies. That is the kind of challenge that could bring the Harvard-educated finance minister from Sivaganga, Tamil Nadu, to his knees.Certainly, there's enough to weigh him down. Although the economy and industry aren't doing that badly when seen in terms of three-year averages, industrial output is down, exports are scraping the 10 per cent mark, corporations are reporting negative numbers for the first time in the post-reforms era, infrastructure continues to be bottled up, interest rates are still high, inflation is rising and government spending is burgeoning. "The International business community suspects India's political will."T.P.G. Nambiar, Group Chairman, BPLThe AgendaGovernment borrowings must decline for companies to borrow at lower interest rates.Public-sector savings need to go up from 1 per cent of GDP now to about 5 per cent.Orient agriculture for exports. Tax a slab of agricultural income. Expand the tax base. Politic or not, it's ridiculous for 11 million of 900 million to pay direct taxes."Government needs to cut interest rates for an economic turnaround."Deepak Parekh, Chairman, HDFCFive years after reforms, the country still ranks 38th among 45 emerging economies in terms of competitiveness (according to the World Competitiveness Yearbook), 42 in terms of infrastrucutre and 44 for quality of manpower. And it's time to go heads up for trouble that could snarl development for these areas and more: dropping government revenue with increasing government expenditure - an oil-pool account deficit approaching Rs 18,000 crore is just one indicator.All of this needs to be addressed without delay and much of it will have to be addressed in the budget for 1997-98. It could be the last post for both Chidambaram and the economy which could take a turn for the worse unless the Government takes up the unfinished agenda of reforms. If there was ever a make or break budget, this is it.And what is that unfinished part of the agenda? "Very simply, while one side of reforms... cutting of tariffs, industrial delicensing, relaxing of imports has happened," says Ravi Ruia, managing director, Essar Group, "the flip side which is just as necessary to equip Indian industry to meet resultant global competition has not kept pace."Corporate CrunchMoney for nothing, plans for free.The earlier option of easy money from stock markets is just not there.The so-called 'bombay club' view is that the mismatch in the pace of reforms - lower import tariffs without improving incentives to domestic industry - makes imports cheaper than local produce. This partly explains the woes of industries - even ones that are changing to keep pace - and also the overall dip in corporate profits.Add to this the cash crunch experienced through 1996 and the drop in industrial output, and the slowdown is easier to comprehend. This approach is not viewed as drum-beating patriotic fervour any longer, but as economics settles into the post-1991 groove of keeping up with the world, as mere good business sense.Party LinesCONGRESS: Finance minister should consider implementing the Biju Patnaik Committee Report to cut government expenditure and control fiscal deficit. Slash interest rates to utilise funds lying with banks, don't tighten money supply excessively, and limit market borrowings. Widen tax base. Concentrate on MODVAT (parity between finished and intermediate products) and review MAT. Oil price revision is inevitable.BJP: Mobilise savings for higher growth. As for taxation, distribute the burden equitably among all. Devise a value-added tax to ensure better burden sharing. The domestic sector needs a level playing field, the debt burden has to be lightened and interest rates stabilised. Ensure operational autonomy of RBI, give tax relief to employment-oriented industries in nonmunicipal areas and ensure disinvestment proceeds are used for capital expenditure.CPI(M): Fiscal deficit itself is not at the root of all evils. It's more to do with servicing past debt and mismanaged government spending; the Government has been cutting social welfare schemes in the name of fiscal deficit. Taxes have to be augmented. A 20 per cent tax on high income people in the agricultural sector; remove fertiliser subsidies.For some, if it's not possible to work things at home, then it's time to look for funds abroad. "If we are to be globally competitive, we should be allowed access to global funds at global interest rates, global fuel costs and global energy rates," demands Bombay Dyeing Chairman Nusli Wadia. "How can we be competitive if energy costs 10 cents vis-a-vis 5 cents in the developed world and between 6 and 7 cents in Korea and Indonesia?" In short, to compete globally, industry has to be allowed features that other global economies have in terms of efficient utilities, infrastructure and for sure, easier and cheaper finance. Says Anil Ambani, managing director, Reliance Industries: "Give me the methods, the tools, the global access to the markets...allow me to raise funds at my risk."But government sees the mismatch differently from business. And though the Government has tried to redress the issue through the usual discussion papers and informal interaction with industry, as Partho Shome, director of National Institute of Public Finance and Policy, New Delhi, puts it: "The commitment is there but the complex network is impeding progress." "Give me the methods, global access to markets ... let me raise funds at my risk."Anil Ambani, MD, Reliance IndustriesThe AgendaBetter targeting through the PDS.Policy on investment should be stable for 2-3 years. For example, MAT has affected investment plans of zero-tax firms; interconnectivity charges in basic telecom services, not part of original tenders, have held up things.Move towards a Value Added Tax system. Reduce the number of slabs in excise structures."Infrastructure should be opened up completely for foreign investment."Adi Godrej, MD, Godrej SoapsAdds Anand Mahindra, deputy managing director, Mahindra and Mahindra: "If the Government means what it says about irreversibility of reforms, then one should not have the need to speculate on the budget." Time for that, unfortunately, is hardly past.As for liquidity, after denying initially that there was a cash crunch, the Government did pump in more funds through a cut in the cash reserve ratio for banks. But that is evidently belated and not enough, mainly because other irritants remain.A wide range of industrialists, business executives and economists interviewed point out absurdities such as the concept of Maximum Permissible Bank Finance, a 20-year-old practice where banks as a pool decide how much to lend.The squeeze is worsened by the comatose condition of the stock markets. Senior SEBI officials reveal that as compared to "over Rs 40,000 crore raised from the public in 1994-95, the figure for 1996-97 would be barely Rs 20,000 crore (inclusive of debt issues, mutual funds, public and rights issues)". The secondary market is doing no better. Of the 6,914 shares listed only 2,000-odd are traded regularly, over 1,800 quoted below book value and over 50 are trading below Re 1. In the past two months, the Government has introduced several proposals and measures ranging from allowing foreign institutional investors (FIIs) to invest in debt securities to adopting the Bhagwati Committee Report, which lays down guidelines for corporate takeovers.On a more informal basis, Ministry of Finance officials call up the SEBI chairman, UTI chairman and even heads of financial institutions to get what they call a "grip on what is going on in Mumbai"; a leading foreign stock broking firm boasts how on a "mere crib" Chidambaram's advisor Jairam Ramesh picked up the phone and "spoke to" SEBI chief D.R. Mehta regarding registration of a fellow foreign broker pending for over eight weeks, as compared to same-day registration in Pakistan. But with efforts not backed by confidence in economic fundamentals by Indian companies, the markets are limping along. Obviously, there is a wide gulf between money needed and money available, with the earlier option of easy money from the capital markets just not there. To put it simply, money will just have to be made available.Infrastructure JamWe know what we need, but...CEOs peg the lack of infrastructure as the single biggest problem.The situation is critical, and the sums required mind-numbing. For infrastructure alone, over the next 10 years, if India is to match up, Rs 70,000 crore is required for telecom, Rs 2,00,000 crore for power, Rs 70,000 crore for roads (added up, close to India's foreign debt) - just for production to keep growing and economic growth to tick along at 7 per cent a year-plus.In an informal INDIA TODAY survey of top CEOs, all pegged lack of infrastructure as the single biggest problem facing the economy today (the high cost of money is a close second).While the Government despairs, the corporate sector believes it can be done, it's just a matter of attracting additional resources. Part of it can be met with the now-traditional suggestion of putting up the estimated $100 billion of hoarded gold in India, the other by the wholesale opening up of infrastructure to foreign investors (it's a service, so no threat to products) which will automatically lead to money for resources India can scarcely find."Don't cut import tariffs till Indian industry matures to face global competition."L.M. Thapar, CMD, Ballarpur IndustriesThe AgendaCost of credit at 13 per cent (pre- and post-shipment) reduces competitiveness, given that international rates vary between 8-9 per cent. Current schemes only benefit top exporters.Remove double taxation on dividends.Levy a uniform capital - gains tax for Indian and foreign companies."How can we be globally competitive with such high energy costs?"Nusli Wadia, Chairman, Bombay DyeingThe fate of privatising the coal sector (so crucial for power) or ports (which would help speed up trade) or power are all hanging. It isn't that the industry doesn't recognise the complexity of the issues involved, it is the redtape and inconsistency in policy that they are raving against. Every coal or power project, for instance, has to be cleared for environment at the state level and yet again at the Centre, and in the back-and-forthing, everybody loses. "How can you talk of growth without power fuelling it?" asks Pramod Mittal of the Calcutta-based Ispat Group. "Of the eight so-called fast-track power projects, seven are lying derailed in various stages and seem to be destined to stay there."At the recently concluded World Economic Forum meeting at Davos, Switzerland, both Prime Minister H.D. Deve Gowda and Chidambaram stressed repeatedly that infrastructure is the key priority for India, second only to controlling the fiscal deficit. But both were quiet on how exactly they would raise the money for anything they had to do, short of hitting a political minefield by raising tax revenue.Meanwhile exports, a critical sector, is getting hit. Exporters have to contend not only with high cost of money and a not-so-free exchange rate, but also the high cost of bottlenecks at ports, airports, and inland shipping facilities, to name a few. Combined with the fact that world trade is in a slump (therefore increasing the level of competition) is the Government's seeming indifference to export promotion. From a high of almost 21 per cent last year, growth in exports has plummeted to just short of 8 per cent between April-November 1996. And much like any other industry, export-oriented ones need to be ideally nurtured in an environment of low inflation, low real interest rates and exchange-rate mechanisms.The Way OutCut expenditure, force political will.No amount of privatisation can overlay a bloated government.Even if all this is sorted out, there remains the question of funding. Opening up of the insurance sector would have brought in funds, but a political consensus has eluded successive regimes. As of now, public-sector divestments have been used to fill budgetary gaps.Subhash Gupte, vice-chairman, UB Group, feels that the Government is pussyfooting over disinvestment. "What is 5 per cent and 10 per cent? The Government must decide the sectors to get out of and sell the controlling stake-at least 51 per cent."Also of immediate concern to budget makers, international investors and to industry at large is burgeoning government expenditure and rising fiscal deficit. This, more than anything else, is at the root of the money crunch, and no amount of privatisation and policy making can overlay a bloated government. A recent report by investment firm ING Barings states that the Indian economy is poised for a shake out similar to the one witnessed in the early '90s. "The balance of payments crisis has been replaced by an internal debt trap. The gross fiscal deficit this year is expected to be among the highest this decade and worse, most state governments will be facing their worst financial crisis."What is required are hard political decisions. But these are, well, hard to come by. The burgeoning oil-pool account deficit is a case in point. Flanked by pragmatists on one side and leftists on the other, Chidambaram is in a quandary. Even though Deve Gowda has gone on record saying a hike in petro-goods prices was "inevitable" to right the oil pool deficit - the BJP, Congress and CPI(M) think similarly - drawing a consensus among the 13 cogs of the UF Government may be the most difficult task.On the other hand, if the decision does come through, it will without doubt lead to a 2.5 point rise in inflation pushing it to double digits. As a way out, for starters it can expand the base of the tax net. HDFC Chairman Deepak Parekh points out that the service sector has grown exponentially in the last five years "but the expansion is not reflected in the tax collection". And many political parties are calling for taxing agricultural income. Clearly, this Government will have to take some seriously unpopular decisions. But will it?The answer is yet again rooted in the politics of the day. While economist Kirit Parikh feels, "it is only weak governments that have taken drastic decisions" others are not so confident. What is apparent is that there has never been a wider gulf between hope and expectation. The Indian economy can hardly afford that.- with Shefali Rekhi and Arun Varma in New Delhi and Suresh Nandi in MumbaiPublished By: AtMigration Published On: Feb 28, 1997 00:00 IST--- ENDS ---

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'Government needs to cut interest rates for an economic turnaround'

The situation calls for hard decisions without delay. Yet such moves could put the ruling coalition in peril.

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