Agreeing with the Finance Minister's comment that the rupee is undervalued, CII said that notwithstanding the structural weaknesses, the rupee is not reflective of the economic fundamentals.
Therefore, the CII noted in a press release that panic reactions to the Rupee's level are not warranted.
The Rupee has lost more than 19 percent against the US Dollar since the beginning of the financial year, accompanied by sharp volatility.
However, the entire depreciation is not unhealthy since large part of this is also correction in the level of the currency, when factoring in inflation over the last few years.
Unfortunately, speculators have been taking undue advantage of this depreciation and adding to the volatility.
While the Government and the RBI have been taking measures to curb speculation, more needs to be done on this front to remove the avoidable edge to volatility, CII said.
Kris Gopalakrishnan President, CII said, "We are seeing some panic reactions to the Rupee's depreciation, which in our view is not called for. Yes, the rupee is undervalued and we are hopeful that over a period of time it would find its level."
Gopalakrishnan said, "We are more concerned with the volatility. Every effort has to be made to ensure that speculative activity on the currency is checked. In addition there are short and medium term actions which need to be taken."
"In the immediate term consideration has to be given to issuing a sovereign guaranteed bond which would be of a substantial amount. Additionally, we need to explore if FII's can be exempt from short term capital gains tax."
He noted, "Foreign investments in the retail sector can be brought in through the creation of a Real Estate Investment Trust and most importantly we need to ensure that no part of the government announces any measures, which would be viewed as business unfriendly."
"Over the medium term - we need to address the issue of current account deficit by building a robust exports sector and a strong domestic manufacturing base," the CII President added.
The root of the problem lies in the wide Current Account Deficit (CAD) and therefore, actions have to be aimed at containing CAD over the next two years and to suitably finance the deficit in the short term, the CII release said.
"While the Finance Minister's announcement to restrict CAD to 3.7pc of GDP, or USD 70 billion, in the current fiscal and ensure its "full and safe" financing is a welcome step, CII feels that a further announcement of a roadmap to contain CAD to 2.5 percent of GDP in next 2years would generate positive sentiment and create assurance that the government has a clear plan," the release said.
"Simultaneously, there appears to be an erosion of investor confidence, which needs to be addressed. Therefore, every arm of the Government, beyond the Ministry of Finance and RBI, have to ensure that no announcements or policy measures are made, which hurt sentiments about India's business friendliness. The responsibility resides with every arm of the government now, including regulators," CII said in the release.
Outlining a few suggestions for the consideration of the Government and the RBI, CII said that every effort has to be made to ensure that there is a healthy inflow of foreign exchange in the country.
"In the very short term, a very careful consideration should be given to the idea of issuing sovereign guaranteed bonds. However, if the Government does decide to go ahead with this, then the amount has to be large, the announcement of which would deter speculators from dragging the rupee down," said CII in the release.
Another short term measure - and CII's second suggestion is that the Government should study the merit of exempting FIIs from short term capital gains tax, which would ensure greater inflow in the capital markets, CII suggested.
Thirdly, opening up foreign investment in the real estate sector subject to specified norms and creating a Real Estate Investment Trust (REITs) under which foreign investors could invest in India's real estate sector could be contemplated to bring in foreign investment into the country.
Fourth, promoting financial savings to channelizing savings through launch of attractive and reliable inflation adjusted instruments which would yield 1.5 percent to 2 percent higher returns than long term average inflation would discourage the rush towards investing in gold.
A fifth suggestion of CII has been aimed at investor sentiments.
CII urged the government to fast track the resolution of the controversial tax provisions pertaining to retrospective amendments, which are to mutual satisfaction of the government and the disputing parties.
A swift resolution to this effect would help investor confidence significantly, the release said.
The underlying problem of a large current account deficit pertains to the real sector and therefore, attempts to find lasting solutions in the financial domain would be misguided, CII said in the release.
Gopalakrishnan said, "Therefore, in the medium term, every effort has to be made to ensure that India can develop a robust exports sector. For that a competitive manufacturing industry is essential."
"Higher value addition for exports has to be encouraged in the country, even as the exports basket is made more diverse. Similarly, it would be a good proposition to explore bilateral arrangements for export of Indian goods with countries from where India is importing energy goods to reduce the trade deficit (e.g. Sudan, Mozambique, etc) and support this by way of export of goods," he asserted.
Steps to discourage influx of non-essential imports such as coal and iron ore would also help to contain the current account deficit, the release said.
--IBNS (Posted on 28-08-2013)