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Industry lobbies divided over need for stimulus

May 07, 2009 11:41 IST

Domestic industry lobby groups Confederation of Indian Industry (CII) and Federation of Indian Chambers of Commerce and Industry (FICCI) seem to have differing views on the need for providing fiscal stimulus immediately after the new government takes over.

This divergence in opinion comes even as there is consensus on the need to implement quick measures to increase investment and productivity, enhance focus on urban infrastructure and ease governance bottlenecks.

"Fiscal stimulus is not needed as space for fiscal incentives is limited, with already high fiscal deficit. Instead, the Reserve Bank of India should further reduce interest rates by 0.5 percentage point," said Chandrajit Banerjee, director general of CII.

According to Ficci secretary general Amit Mitra, the new government will have to rationalise the tax structure by increasing the income tax exemption limit as a means to provide fiscal stimulus to the economy.

"Where you raise the minimum taxable income slab to Rs 2.5-3 lakh (Rs 250,000-300,000), the administrative cost is saved. It won't impact collections because you collect very little from that income bracket and you incur huge administrative cost," said Mitra.

Mitra also called for bringing down corporate tax and do away with exemptions, except for investment purposes.

With global financial crisis adversely impacting private consumption and investment demand, the Centre had announced three fiscal stimulus packages since December last year to boost domestic demand. This has led to a sharp increase in fiscal deficit to 6 per cent of GDP as against initial estimate of 2.5 per cent in 2008-09.

Industry veterans have vouched for the need for further fiscal incentives.

"With interest rates coming down, the government can borrow at lower rates and focus on building infrastructure, which can have a ripple effect and benefit many sectors like steel, cement, mining and construction. The government can also raise money by selling stake in PSUs and banks," said Arvind Parakh, director (strategy & business development), JSL Ltd (formerly Jindal Strips Ltd).

According to Praveen Sood, chief financial officer of HCC, the government should go in for a stimulus package even if it means higher interest rates in the short run. "Why do you need a stimulus package: because there's a slowdown," he added

But the industry bodies were unanimous on measures like need for further cut in interest rates, a detailed road map on Goods and Service Tax, focus on speedy implementation of infrastructure projects.

"Government should bring out a roadmap for infrastructure. And focus should not only be on PPP, where funding had become an issue, but also on annuity and EPC projects," Banerjee added.

According to Mitra, if the measures suggested by Ficci in a pre-budget memorandum early this year are implemented, India could see about 8.5 per cent growth in the last quarter of 2009-10. "These are low hanging fruits, Pick them up and implement them," he added.

Economists see the current scenario as an opportunity to bring about some long-pending reforms. In a recent interview to Business Standard, India's chief economic adviser Arvind Virmani had called for initiation of fiscal reforms by the new government.

In addition, he also called for a new energy policy in the first year itself, so that there is complete de-control of petroleum prices, as well as educational reforms to address skills gap.

"In particular, subsidy reforms -- both oil and fertiliser -- should be tackled. This would send a strong signal that the government is committed to fiscal discipline," said Virmani. A decrease in subsidies would mean reduced government expenditure on this account.

Agreeing that the immediate priority for the new government was fiscal management, Abheek Barua, chief economist with HDFC Bank, said "The approach to fiscal management will be watched very closely. Due to the uncertainty on this front, the bond markets are jittery, there is a possibility of India's rating getting downgraded, banks are holding on to their lending decisions."

He also called for ensuring credit flows to small and medium enterprises, which have been facing difficulty in garnering loans.

(Additional reporting by Ranju Sarkar)

Rituparna Bhuyan & Devika Banerji in New Delhi
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