First 100 Days Agenda For The New Government

Bringing back confidence in the Indian economy: 100-day agenda for the government FICCI’s Business Confidence Survey over the last three quarters has shown a decline in industry’s confidence level. Inflation level is creeping up and the fiscal situation is not in the pink of health, given the massive food, fuel and fertilizer subsidies1. The interest rates in the economy have increased significantly and industrial growth has lost steam over time. The graphs below show the decline in business confidence (Figure 1), slowdown in industrial growth particularly in manufacturing and simultaneous rise in inflation (Figure 2). Figure 1 F IC C I B usiness C o nf id ence Ind ices

80 75 70 65 60 55 50 45 40

Cur r ent condi ti ons i ndex

Expectati ons i ndex

Over al l busi ness conf i dence i ndex

Figure 2 Industrial Growth and Inflation

14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0

Manufacturing

General

Jun-08

May-08

Apr-08

Mar-08

Feb-08

Jan-08

Dec-07

Nov-07

Oct-07

Sep-07

Aug-07

Jul-07

Jun-07

May-07

Apr-07

Mar-07

Feb-07

Jan-07

Dec-06

18 16 14 12 10 8 6 4 2 0

WPI

Inputs gathered by FICCI from industry members show that the fall in business confidence and the loss of momentum of industrial growth are largely due to tight monetary policy followed by the RBI. Over the last two years, the central bank has raised the repo rate and increased CRR successively. This was done to rein in the inflationary pressures that were developing in the

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In the recent FICCI National Executive Committee meeting at Bangalore, Mr. T N Ninan, Editor, Business Standard said “Fiscal situation has never been worse since 1974”. 1

economy. However, FICCI’s research shows that inflation in India has proved to be insensitive to interest rates (Figure 3 and Annex 1). In other words, interest rates, as a tool to manage inflationary pressures is not yet producing results. On the contrary and as already mentioned, the rising interest rates have taken a toll on the growth process and have considerably slowed down the Indian industry and impaired investor confidence. Figure 3 Monetary Policy and Inflation

14 12

Percent

10 8 6 4 2

WPI

Repo rate

Jul-08

Jun-08

May-08

Apr-08

Mar-08

Feb-08

Jan-08

Dec-07

Nov-07

Oct-07

Sep-07

Aug-07

Jul-07

Jun-07

May-07

Apr-07

Mar-07

Feb-07

Jan-07

Dec-06

0

CRR

FICCI studies show that current inflationary trends are being caused by serious supply side issues of capacity. These supply issues can only be addressed by rapidly creating more capacity on a war footing. In a sense, therefore, to sustainably address this inflationary problem requires an economic policy that ensures rapid investment flows into building out additional capacities. Thus, investment formation should remain at the core of the economic strategy when it comes to inflation. The current monetary policy efforts aimed at controlling inflation are having the exact opposite effect with capacity expansion being deferred and have the real risk of causing stagflation. FICCI proposes the following 100-day agenda for the government. As a prescription to bring back confidence in the economy, FICCI recommends the following: 1. Urgently stimulate investment across the economy 2. Enhance efficiency and competitiveness of our economy by targeting reduction in transaction costs 3. Set new standards in governance 4. Address the perception of a looming fiscal crisis 1. Urgently stimulate investment across the economy – The expansion of the Indian economy over the last four years has been on the back of increasing investment flows and rising investment to GDP ratio. Therefore, it is important for the government to sustain and stimulate such investments in critical sectors so that growth is maintained.

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Investment formation in agriculture – Agriculture contributes 20% to the national income and provides employment to 60% of the population. FICCI believes that the entire agriculture economy, given the focus of the government, can be transformed from a largesse driven sector to an internationally competitive sector where Indian farmer and agri business can become the food suppliers to the consumer of the world. The government policy should trigger a second green revolution and for this we suggest the following : Priority sector lending norms for the banks should be appropriately changed to include investments made by corporates in agri market infrastructure such as construction of warehouses, cold chain transportation etc. in the direct finance category of priority lending. Private sector investment in agri infrastructure should be eligible for 150% weighted deduction as is the case with investment in R&D. The same benefit should also be extended for investments made in agri R&D and extension services provided to the farmer. Recommendations of Dr. Mashelkar and Dr. Swaminathan committees on restructuring the ICAR system should be implemented. Amending the APMC acts at the state level so as to allow setting up of private mandis, direct procurement from farmers and contract farming is important to impart vibrancy to the agriculture sector and attract the much needed investments. Central government must therefore set up an empowered committee to resolve the pending issues with regard to APMC amendments at the state level as also to bring uniformity in laws across states. The committee must also follow up on the implementation of the changed laws in full letter and spirit at the ground level. Investment formation in financial sector – Liberalization of Indian markets in insurance, pensions and fund management would lead to the development of new sources of capital and deepen India’s domestic capital markets. For achieving this goal, the government may consider the following: Government should take up the Insurance Laws Amendment Bill including hiking of cap on foreign stake in insurance firms to 49% from the current 26%. The government must take up this issue as insurance is a capitalintensive business and foreign investors can be an important source of capital for the domestic players in this business. The Pension Fund Regulatory and Development Authority Bill is pending in Parliament despite the approval of the Standing Committee on Finance. Government should take up this bill at the earliest. The Banking Regulation Bill is pending in Parliament. This should be taken up by the government, as there is a need to align voting rights with shareholding to attract fresh investments into the sector. Further, there is a need to rationalize government shareholding in banks. This has been a long pending issue and is constraining the capacity of banks to raise capital to provide more credit for growth. Investment formation in telecom – In order to push investment formation in this sector, the government should expedite the announcement of a world-class 3G policy and auction guidelines, allowing for an open, global and transparent auction process consistent with international best practices. This would help build a green field pan

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India state of the art communication infrastructure in the country and bring in fresh investments to the tune of US$ 8 to US$ 10 billion over the next two to three years. Investment formation in other sectors Infrastructure - The infrastructure facilities in our country are bursting at the seams. This substantially adds to our manufacturing costs and limits our competitiveness. To address the infrastructure deficit in the country, it is important that the government leverage the country’s private sector and its resources in a public private partnership framework. The UMPP experience has shown that PPPs, if backed by a will to provide an equal opportunity to private developers in a transparent and conducive environment, can lead to implementation of projects of any scale and at very competitive prices. The government should follow a similar approach in all the other infrastructure areas and to give an immediate boost to investments in this sector consider the following: Develop a robust inventory of projects that can be offered to the industry. Completed project dossiers with all approvals granted should be offered to the private sector through the competitive bidding route. To overcome the problem of time and cost over-run, the government should initiate long-term integrated plans and promote coordination among different departments and states. Accelerate the pace of work on the Delhi-Mumbai Rail freight corridor. Government should also initiate work on private sector participation for modernization of Railways. SEZs - In the case of the SEZs, there has been a lot of back and forth movement. FICCI suggests that the policy framework for SEZs should be stabilized. The ceiling of 5000 hectares on multi-product SEZs needs to be reviewed and done away with. Energy - Finalise a comprehensive demand moderation strategy based on market forces and incentive / disincentive structure. Such a move would not only help economize energy consumption but also improve the economics of the sector and thereby promote greater investments. Retail - Retail is a fast-growing sector with significant capacity for employment generation. Granting ‘Industry’ status to this sector and allowing FDI in multi-brand retail will lead to a quantum jump in investments into this sector. Education – To attract private investment into higher education allow companies under section 25 to set up higher educational institutions to plough back surpluses for development and expansion. Defense - Open up the defense and homeland security industry to the private sector to leverage the capabilities of industry for achieving the long-term goal of indigenisation of India’s defense imports. Towards this end, the

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government should implement the RURs and broaden the RUR norms to enhance scope for private sector participation in this important sector. Reform labour laws Make labour a state subject and let the state governments decide on the changes that need to be introduced in the labour regulations keeping in mind the requirements of the local industry. Finance, taxation and banking Calibrate the interest rate policy by giving due attention to the investment needs of the economy and industry. Expedite the introduction of the proposed Income Tax code. The recommendations of the J J Irani Committee on Company Law should be incorporated in the proposed new Company Law Bill and the same should be introduced in the parliament at the earliest. Work on the Limited Liability Partnership (LLP) Bill should be expedited and the same should be tabled in the parliament. Government should relax the guidelines with regard to raising ECBs and their end use. Greater flow of funds from abroad into the Indian market would not only support investment activity, but also stem the depreciation of the Rupee and help in managing the ‘imported inflation’ that we face given the rising price of crude oil in the international market. For addressing the long-term financing needs of the industry, the government must give a strong impetus to develop and deepen the debt markets in India. Deep and vibrant debt markets can play a vital role in infrastructure financing that needs long term funds. With the role of DFIs in the economy waning, it is important that insurance companies and pension funds along with banks and specialized financial institutions are encouraged to participate in the long term debt market. 2. Enhance efficiency and competitiveness of our economy by targeting reduction in transaction costs Create a seamless national market for industry – Removing the barriers in inter-state movement of goods will considerably bring down the time and costs incurred by industry and improve transactional efficiency. Government must push for streamlining the process of granting environment clearance for industrial projects. Introduce the concept of ‘deemed approved’ after 90 days. Arrive at a consensus to rationalize compliance norms for manufacturing industry to minimize inspector raj. 3. Set new standards in governance Improve efficiency in public spending. Lack of reforms in public institutions, absence of user feedback mechanisms, difficulties in monitoring the delivery mechanisms make it difficult, especially for the weaker sections of the society, to access the various schemes and services provided by the government.

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There is scope for bringing about considerable improvement in the quality of public spending. Government must consider partnering with civil society institutions to evaluate and improve the outcomes of various publicly funded social and economic schemes. FICCI has offered to partner the government in monitoring and evaluating select central government plan schemes such as National Child Labour Project, Welfare of SC / ST job seekers through coaching, guidance and vocational training, Scheme for infrastructure development in food processing industries, MSME cluster development programmes and MSME growth poles etc. Disinvestment of up to 10-15% through the market route - The government must take a fresh look at this issue and initiate disinvestment of public sector units. This process would help the government partially meet the expenditure that has been committed for the social sectors as well as for the farm loan waiver scheme announced in the last budget. Fill up all vacancies in regulators. Ensure better targeting of subsidies - Today there is no clarity and consensus on target groups for various subsidies. The government must develop a mechanism for identifying and targeting beneficiaries for these subsidies. 4. Address the perception of a looming fiscal crisis

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Annex 1 WPI (Monthly average) – Year on year growth in % Monetary and Fiscal measures taken to control inflation Month

WPI

Effective since Jan 24, 2006 June 9, 2006

Repo rate 6.50 6.75

July 25, 2006

7.00

Effective since

CRR

Month

Fiscal and other measures

June 2006

Customs duty on import of pulses reduced to zero till March 2007 Ban imposed on export of pulses till March 2007 Sugar exempted from customs duty till September 2006 and its exports banned Private traders permitted to import wheat at 5% duty

Aug 2006 Sept 2006

Customs duty on palm oils reduced by 10 percentage points to 70-80 per cent

July 2006 Aug 2006

4.82 5.14

Sept 2006

5.38

Oct 2006 Nov 2006 Dec 2006 Jan 2007

5.47 5.40 5.68 6.38

Oct 31, 2006

7.25

Jan 31, 2007

7.50

Dec 23, 2006 Jan 6, 2007

5.25 5.50

Jan 2007

Reduction in customs duties on items such as inorganic chemicals, non-ferrous metals, cement, capital goods and project imports Portland cement exempted from basic customs duty

Feb 2007 Mar 2007

6.34 6.61

Mar 31, 2007

7.75

Feb 17, 2007 Mar 3, 2007

5.75 6.00

Mar 2007

Apr 2007

6.27

Apr 14, 2007 Apr 28, 2007

6.25 6.50

Customs duty on import of pulses reduced to zero till March 2007 (on 8th June 2006) extended till August 2007 Ban imposed on export of pulses till end March 2007 (on 22nd June 2006) extended till end March 2008 Import of wheat at zero duty, applicable up to end-December 2006 extended further to end-December 2007 Import of Portland cement exempted from countervailing duty and special additional customs duty Customs duty on palm oils reduced by 10 percentage points across the board

May 2007 June 2007 July 2007

5.45 4.52 4.71

Aug 2007

4.14

Sept 2007 Oct 2007

3.51 3.13

Apr 2007

July 2007

Aug 4, 2007

7.00

Aug 2007

Oct 2007

7

Private traders permitted wheat at zero duty

to

import

Import duty on various edible oils reduced by 5-10 percentage points. Import duty on palm oils reduced by five percentage points – from 50% to 45% in the case of crude palm oil and from 57.5% to 52.5% in the case of refined palm oil. 4% additional countervailing duty on all edible oils withdrawn Customs duty on palm oils reduced by another 5 percentage points (additional to 10 percentage points as on April 2007) To increase the availability of onion, NAFED increased the minimum export price (MEP) by US $ 100 per tonne for all destinations Further to announcement on 20th Aug 2007, NAFED increased the MEP by another US $ 50 per tonne with effect from October 2007 for restricting exports and augmenting availability in

the domestic market

Nov 2007 Dec 2007 Jan 2008 Feb 2008 Mar 2008

3.25 3.83 4.46 5.27 6.65

Nov 10, 2007

Apr 2008

7.87

Apr 27, 2008

May 2008

8.17

May 10. 2008

8.00

May 24, 2008

8.25

June 2008

11.4 7

7.50

Mar 2008

7.75

June 12, 2008

8.00

July 5, 2008

8.50

June 24, 2008

8.50

July 19, 2008

8.75

8

Apr 2008

May 2008

June 2008

Customs duty on semi-milled or whollymilled rice reduced from 70% to zero per cent up to March 2009 Customs duties on crude and refined edible oil reduced from a range of 4075% to 20-27.5% Export of all edible oils prohibited with immediate effect from March 17, 2008 Export of non-basmati rice banned and minimum export price (MEP) for basmati rice raised to US $ 1,200 per tonne Government also announced to allow import of crude form of edible oil at zero duty and refined form of edible oil at a duty of 7.5% The ban on export of pulses extended for one more year beginning April 1, 2008 Steel producers asked to hold the price line Export cess ranging from 5% to 15% levied on different steel products Ban on futures trading of potato, rubber, chana and soya oil for limited period Export duty on long steel products hiked from 10% to 15% 15% flat advalorem export duty imposed on all iron ore shipments Excise duty on petrol and diesel cut by Rs. 1 per litre Customs duty on crude cut from 5% to nil Customs duty on petrol and diesel cut from 7.5% to 2.5%

Annex 2 Important economic bills pending in the Parliament Serial No.

Bill

Ministry / Department concerned

1

The Pension Fund Regulatory and Development Authority Bill, 2005 The Banking Regulation (Amendment) Bill, 2005 The Forward Contracts (Regulation) Amendment Bill, 2006

Finance

2 3

4

The Information Technology (Amendment) Bill, 2006

5

The State Bank of India (Amendment) Bill, 2006 The Airports Economic Regulatory Authority of India Bill, 2007

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9

Finance Consumer Affairs, Food and Public Distribution Communications and Information Technology Finance Civil Aviation