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India Inc expects measures by RBI, government

Posted on Jan 25, 11:38PM | IBNS

An optimistic India Inc is expecting a slew of measures both by the government and the Reserve Bank of India (RBI), including the interest rate cut, between now and the next month when the Union Budget is presented in Parliament, an outlook assessment done by the ASSOCHAM pointed out.

"Finance Minister P Chidambaram has already given a clear hint that the investors need not worry about increase in most of the key taxes in the forthcoming Budget. His assurance more or less settles the concerns over the talk of new taxes to meet the difficult fiscal situation. Now it is to be seen as to how far the RBI moves in sync with the Finance Ministry in reviving the investment appetite when it reviews the credit policy on January 29," an ASSOCHAM paper on the policy outlook pointed out.

The paper which is prepared days before the unveiling of the RBI credit policy and about five weeks before the Union Budget also highlighted concerns of India Inc which range from high interest rates, global concerns, continuous decline in merchandise exports and a very high current account deficit.

However, the chamber document expressed satisfaction over the way the government has gone about taking some politically difficult decisions including hiking diesel prices, putting the "ghost" of GAAR to rest and hiking import duty on gold to curb the current account deficit.

"These are not popular decisions and are difficult to take, especially when the general elections are a little over a year away. But the Finance Minister has shown a great amount of frankness and did not pretend to be presiding over a rosy economic picture. On the contrary, he went about admitting that there are issues - be it GAAR, slowdown in investment, high inflation and slow growth. He even goaded the RBI to cut the interest rates," the chamber said.

While the RBI did not oblige the industry as well as the government last time around, the ASSOCHAM expects it to go in for at least 25-50 basis point cut in the benchmark interest rates. The industrial growth remains quite elusive and quite a few sectors are impacted by an hawkish credit policy being pursued by the RBI for the last over two years, the paper said.

Most of the analysts that the ASSOCHAM researchers talked to are of the opinion that the war on inflation seems to have been won following a tight monetary policy pursued by the RBI for long. In the coming months, the benchmark inflation may further come down. It had already touched a three-year low at 7.18 per cent December, 2012.

On the overall macro situation, while the economy is expected to grow by sub- six per cent in the current fiscal, things look much better now than about six months ago, the paper said.

Helped by the global liquidity influx by central banks in the developed world, the global investors are betting again on the equity markets all over the world, including the emerging markets. Some of the sectorals appear to be attractive in valuation and they are expected to give a further push to the stock markets.

For instance, India alone has seen a growth of about 20-25 per cent in the stock prices in the last few months, thanks to the global liquidity and several confidence-buidling measures announced by Finance Minister P Chidambaram, who is trying hard to get the investment cycle back on track as a growth driver.

However, the twin deficits - fiscal and the current account continue to cause some anxiety among investors and global rating agencies.

While some have expressed doubts whether the government would be able to stick to the revised target of 5.3 per cent fiscal deficit for the fiscal 2012-13, ASSOCHAM feels that since Mr Chidambaram means what he says, the parameters would be more or less adhered to.

The mantra would have to be reining in wasteful expenditure and untargeted subsidies, it said.

After all, the Finance Minister has already given some kind of assurance that he is not relying for tax increases to fill in the government kitty. However, there is a lot of scope for expenditure cut under the revenue head, the paper observed.