Assocham Proposes Six-Point Formula to Stimulate Demand and Boost Economy

In a bid to combat a meltdown in India's economy brought about by the worldwide economic crisis, Sajjan Jindal, President of the Associated Chambers of Commerce and Industry of India (Assocham) (New Delhi), has drawn up a six-point strategy aimed at creating demand in a receding market. The proposed strategy is based on the premise that India needs to shift focus from managing inflation to stimulating growth in the market, according to research by Industrial Info Resources (Sugar Land, TX).

Assocham indicates that the recent reduction in the prices of petrol and diesel by U.S. 10.17 cents per liter and U.S. 4.07 cents per liter, respectively, would moderate inflation by 2 percent over the next two months. Inflation soared to a high of 12.8 percent in August this year but gradually fell to 8.4 percent for the week ending November 22. The agency expects the plan to reduce inflation to 6 percent over the next eight weeks.

Assocham recommends that excise duty, which currently stands at 8 percent, be slashed across sectors and capped at 4 percent for the automotive, cement and steel industries, which are grappling with plunging market demand. It also called for a reduction in interest rates for housing loans of less than $30,522 to 7 percent from the present 13 percent to 14 percent to stimulate demand and further prescribed that the government facilitate guarantees from the National Housing Banks for new housing loans. It suggests that personal assets of individual borrowers should not be seized in the event of defaults on housing loans and that the loans should instead be restructured.

Assocham has asked for corporate income tax to be slashed by 10 percent to enable organizations to reinvest in capacity expansion programs. The Chamber indicates that the falling prices of commodities will create demand for product modifications. It has also called for a reduction of 10 percent in personal income tax rates to enhance the purchasing power of consumers to stimulate demand.

The agency also recommends that the central sales tax, which currently stands at 2 percent, be abolished immediately. It has called for an immediate increase in DEPB to neutralize indirect taxes imposed on exports and has recommended an exemption from income tax on export income on manufactured goods. It also suggests an extension of pre- and post-export shipment credit to a longer maturity of 360 days with a concessional annual interest rate of 8 percent per rupee loan.

Assocham has also suggested a further reduction of 7 percent in interest rates, of 4 percent in statutory liquid ratio (SLR) and of 3 percent in cash reserve ratio (CRR). The chamber has indicated that the recent move by the Reserve Bank of India (RBI) to slash repo and reverse rates by 1 percent is inadequate in the present circumstances that require drastic fiscal measures to bring a turnaround in the economy. The negligible difference between the reverse repo rate at 5 percent and the inter-bank call money rate at 6.5 percent causes banks to deposit funds with the RBI through the reverse repo window, resulting in low liquidity in the market. Commercial banks have deposited more than $10.38 billion with the RBI on a daily basis under the reverse repo window. Assocham has also recommended that the SLR be reduced to 20 percent and that banks be discouraged from the risk-averse tendency of parking funds for the SLR requirement instead of distributing loans.

The chamber proposes that the government should accelerate spending on ongoing infrastructure projects and undertake immediate disbursement on a priority basis of loans sanctioned by banks for projects in the core sectors, including capital goods, cement, infrastructure and steel. The government recently proposed $10.2 billion to boost the infrastructure sector in the country. However, A.M. Naik, Chairman and Managing Director of Larsen & Toubro Limited (BSE:500510) (Mumbai), points out that the proposed fund would only aid two or three large projects and is inadequate for the industry, which requires annual investments of at least $100 billion.

More than 300 power and infrastructure projects in the private sector are yet to achieve financial closure because of the credit crunch. Naik said he believes that only projects with backing from the state are well positioned to take off. Recommending tax waivers for the construction industry, he has said that only 60 percent to 65 percent of proposals are likely to be implemented in the Eleventh Five Year Plan Period (2007-12). He recommended that the proposed funds be channeled through a state-owned agency to provide adequate guarantee to reluctant lenders.