Monday, December 28, 2009
Stimulus exit only after full recovery: FM
Stimulus exit only after full recovery: FM
The Financial Express, December 25, 2009, Page 2
fe Bureaus, Kolkata
Finance minister Pranab Mukherjee has said that the stimulus package announced by the government will be withdrawn only when there is a full recovery of the country’s economy.
“The stimulus was injected to boost the economy. Unless a full recovery is possible and the planners are in a position to make a hard assessment that it is the time to withdraw [stimulus] then only it will be done,” he said.
The Union government provided for three stimulus packages after the financial crisis to stall the declining growth of economy. It was done together with measures from the Reserve Bank of India.
Present at the 23rd Industrial India Trade Fair organised by the Bengal National Chamber of Commerce and Industry and the government of West Bengal, Mukherjee said that if there is even a negative growth of agriculture [during the third quarter] it will be adequately compensated by the manufacturing and services sector.
According to him, the first quarter GDP grew at 6.1% where the contribution of agriculture was 2.5%. In the second quarter GDP grew at 7.9% and the contribution of agriculture had come down to 0.91%. “That means services sector and manufacturing sector have contributed more towards the economy as well as the GDP basket,” he said.
Commenting on exports scenario, he said growth in exports could only be achieved when there is a robust growth in Europe, North America and Japan— the three destinations consume almost 62% of India’s exports.
“Exports fell for 13 consecutive months. There has been some recovery from November but I am not sure what the final figure will be at the year-end.”
The Financial Express, December 25, 2009, Page 2
fe Bureaus, Kolkata
Finance minister Pranab Mukherjee has said that the stimulus package announced by the government will be withdrawn only when there is a full recovery of the country’s economy.
“The stimulus was injected to boost the economy. Unless a full recovery is possible and the planners are in a position to make a hard assessment that it is the time to withdraw [stimulus] then only it will be done,” he said.
The Union government provided for three stimulus packages after the financial crisis to stall the declining growth of economy. It was done together with measures from the Reserve Bank of India.
Present at the 23rd Industrial India Trade Fair organised by the Bengal National Chamber of Commerce and Industry and the government of West Bengal, Mukherjee said that if there is even a negative growth of agriculture [during the third quarter] it will be adequately compensated by the manufacturing and services sector.
According to him, the first quarter GDP grew at 6.1% where the contribution of agriculture was 2.5%. In the second quarter GDP grew at 7.9% and the contribution of agriculture had come down to 0.91%. “That means services sector and manufacturing sector have contributed more towards the economy as well as the GDP basket,” he said.
Commenting on exports scenario, he said growth in exports could only be achieved when there is a robust growth in Europe, North America and Japan— the three destinations consume almost 62% of India’s exports.
“Exports fell for 13 consecutive months. There has been some recovery from November but I am not sure what the final figure will be at the year-end.”
Low base pushes up infra growth to 5.3%
Low base pushes up infra growth to 5.3%
The Financial Express, December 25, 2009, Page 2
fe Bureaus, New Delhi
The index of six core infrastructure industries expanded 5.3% in November, the most in three months, due to a weak base in the corresponding period in the year ago month. Though a record rise in steel output boosted the numbers, the real support came from the cement sector where strong production growth was witnessed during month under consideration.
November’s core sector performance was way above the meager 0.8% growth recorded in the same month last year, and an improvement on the 3.8% growth seen in October. In the eight months of April to November 2009, the core infrastructure sector grew 4.6% as against 3.5% in the corresponding period last year.
“The numbers indicate that while construction sector is doing well, other basic infrastructure sectors are lagging. Overall, it seems that the symptoms of sustained growth in the core sector has not sustained. We have to be careful while talking about recovery of the economy. Probably, there are some doubts that are still there and a full recovery may be prolonged,” said D K Srivastava, Director, Madras School of Economics.
With the base effect playing a large role in the November numbers, the Index of Industrial Production during the same month may not see the robust growth that it witnessed in the past couple of months. The core sector comprises 27% of the IIP.
Finished (Carbon) steel output stood at 4,6,38,000 tonne, an annual rise of 11.7% in November. Though this is the highest increase in 25 months, it came on the back of a 6.3% contraction in same month of the previous year. Steel is a key input in the construction industry and off late its demand has been driven by the infrastructure sector as real estate activity remained weak.
Cement production in the month stood at 1,61,80,000 tonne, an increase of 9% during the month. However, out put from the sector has been waning after August, when it peaked at 17.6%. Cement is another key input in the construction sector. In the months between February to August this year, the sector grew in the range of 11.8 to 17.6% as the stimulus packages announced by the government boosted infrastructure activity.
Output from power plants increased only 1.8% during November, the least in nine months. As thermal plants produced lesser electricity compared to the previous year, coal mines output also remained weak at 3.3%. Nearly 80% of the coal output is used by thermal power plants. Recently, a Parliamentary Consultative Committee had pulled up the coal ministry arguing of the 208 captive coal mine blocks it awarded, many of which went to power and steel plants, only 25 have become operational. The country is expected to import 70 million tones of coal to meet domestic requiremet.
The Financial Express, December 25, 2009, Page 2
fe Bureaus, New Delhi
The index of six core infrastructure industries expanded 5.3% in November, the most in three months, due to a weak base in the corresponding period in the year ago month. Though a record rise in steel output boosted the numbers, the real support came from the cement sector where strong production growth was witnessed during month under consideration.
November’s core sector performance was way above the meager 0.8% growth recorded in the same month last year, and an improvement on the 3.8% growth seen in October. In the eight months of April to November 2009, the core infrastructure sector grew 4.6% as against 3.5% in the corresponding period last year.
“The numbers indicate that while construction sector is doing well, other basic infrastructure sectors are lagging. Overall, it seems that the symptoms of sustained growth in the core sector has not sustained. We have to be careful while talking about recovery of the economy. Probably, there are some doubts that are still there and a full recovery may be prolonged,” said D K Srivastava, Director, Madras School of Economics.
With the base effect playing a large role in the November numbers, the Index of Industrial Production during the same month may not see the robust growth that it witnessed in the past couple of months. The core sector comprises 27% of the IIP.
Finished (Carbon) steel output stood at 4,6,38,000 tonne, an annual rise of 11.7% in November. Though this is the highest increase in 25 months, it came on the back of a 6.3% contraction in same month of the previous year. Steel is a key input in the construction industry and off late its demand has been driven by the infrastructure sector as real estate activity remained weak.
Cement production in the month stood at 1,61,80,000 tonne, an increase of 9% during the month. However, out put from the sector has been waning after August, when it peaked at 17.6%. Cement is another key input in the construction sector. In the months between February to August this year, the sector grew in the range of 11.8 to 17.6% as the stimulus packages announced by the government boosted infrastructure activity.
Output from power plants increased only 1.8% during November, the least in nine months. As thermal plants produced lesser electricity compared to the previous year, coal mines output also remained weak at 3.3%. Nearly 80% of the coal output is used by thermal power plants. Recently, a Parliamentary Consultative Committee had pulled up the coal ministry arguing of the 208 captive coal mine blocks it awarded, many of which went to power and steel plants, only 25 have become operational. The country is expected to import 70 million tones of coal to meet domestic requiremet.
Demand slump forces realtors to turn malls into homes, offices
Demand slump forces realtors to turn malls into homes, offices
The Financial Express, December 25, 2009, Page 4
Mona Mehta, Mumbai
A lacklustre show by retail malls is prompting developers to convert them into residential and commercial spaces.
After showing a high growth in 2007-08, retail mall development has virtually come to a standstill as tenants curtailed expansion plans. Developers now find it worthwhile to convert retail space into homes and offices, considering the demand growth in this segment. Demand for homes has grown 40% to 50% in various parts of the country in the last two quarters of the current financial year as builders reduced prices and buyers scouted for second homes in mini metros. Office space demand has been growing around 15% to 20% in the first part of FY 2009-10, according to builders and property consultants.
Delhi-based Raheja Developers, which was in the process of developing 2.5 lakh sq ft retail space in association with the Delhi Development Authority, has decided to convert 2 lakh sq ft land into commercial space.
Only the rest will be used for retail development. Harinder Dhillon, vice-president — marketing, Raheja Developers, said, “During 2007-08, demand for retail mall development had grown by 50%. However, after the slowdown, retail mall development has been negligible.” The firm may also look at similar conversions at its Gurgaon property as well. Similarly, Dreams Mall, spread across 8 lakh sq ft in Kandivali, Mumbai, and owned by Satra Properties is being converted into residential space. Only 10% will remain for retail purposes.
Meanwhile, Housing Development and Infrastructure Ltd is in the process of converting one million sq ft of retail into commercial development. Rustomjee Builders too is converting its under construction 4 lakh sq ft retail mall development into commercial space. Also, Matushree Developers is converting 100% of its 7 lakh sq ft retail mall development into commercial space
RMZ Galleria in Bangalore too has stopped marketing one million sq ft as retail and converting it into commercial development. DLF has recently sold off its Whitefield (Bangalore) retail space to Netapp for office construction. Pune-based International Convention is also in the process of changing bulk of its 7 lakh sq ft retail space into office space. Across the country, 13% of the planned retail development has been converted for other uses, like office or residential, in the past year and half, Gulam Zia, national director — research and advisory services — Knight Frank India Pvt Ltd, said.
However, this sort of conversion has put an adverse impact on creation of further retail spaces. As there were no significant additions in retail malls, it has already started showing on supply crunch ahead. Going forward, supply in the short-term may already be less than the demand putting upward pressure on rentals, Zia added.
Ambar Maheshwari, head of investment advisory, DTZ International Property Advisers, said, “Demand for development of retail mall is being deferred in prime locations. .”
Ketan Sheth, managing director, Goldmine Project Consultants, said, “Over 26 million sq ft of commercial space would hit the market by 2012, of which, 11 million sq ft would be ready by this year itself.”
Ackruti gets Rs 1,000 cr funding
Ackruti gets Rs 1,000 cr funding
Business Standard, December 25, 2009, Page 3
Business Standard, December 25, 2009, Page 3
Real estate slowdown hits rly land development plan
Real estate slowdown hits rly land development plan
Business Standard, December 25, 2009, Page 7
Sharmistha Mukherjee / New Delhi
The liquidity crunch in the real estate sector has hit Indian Railways’ efforts to lease out surplus land for commercial development on public-private partnership.
Last week, the Railway Land Development Authority (RLDA) cancelled the bidding process for developing a private residential complex at Sarai Rohilla in Delhi. A senior official at RLDA said, “The developer at Sarai Rohilla was repeatedly deferring the date for making the upfront payment for the plot. We have decided to drop the tender for the project.”
The site, spread over 11 hectares, had been offered last April for constructing a residential complex with facilities such as a shopping complex and health care centres. The reserve price had been set at Rs 675 crore.
The official added, “Due to the credit crunch in the real estate sector, we are not being able to get the reserve price we are quoting for our plots. We have specifically decided to take a relook at the sites which had been identified for residential use. The matter is now under the consideration of the Railway Board.” This decision has also put a question mark on the 39-hectare residential complex project proposed at Nirala Nagar, Kanpur.
Plans to build retail space at Visakhapatnam in Andhra Pradesh have run aground, with the company which had won the contract forfeiting the bid security because it cannot go ahead with the purchase of the land. It is the same story at Bandra, Mumbai, where a 4.5-hectare plot had been put up for bids. RLDA had brought down the reserve price to Rs 3,960 crore from the initial Rs 4,628 crore at Bandra, but the project had found only one taker (DLF). The tender process there has now been put on hold, because of a dispute with local authorities on ownership.
Of the 12 sites, spanning 80 hectares, a development agreement has been signed for a solitary location at Gwalior. Commercial real estate development, which includes facilities for organized retail, shopping malls, food plazas and an entertainment zone, is being considered for the site.
Another agreement is expected to be concluded soon for constructing hospitality and retail spaces at Bangalore. RLDA expects to rake in about Rs 60 crore from a one-time upfront payment from developers at these two locations.
RLDA had been set up in 2007 to commercially develop the surplus and unused land with the railways. Till date, from the 43,000 hectares in the railway land bank, 133 sites, spanning 1,500 hectares, have been entrusted to it by the ministry. Consultancy work for 51 sites is in progress, while another 70 plots are under inspection. However, with the real estate sector continuing to remain in the red, the projects have not made much headway.
Business Standard, December 25, 2009, Page 7
Sharmistha Mukherjee / New Delhi
The liquidity crunch in the real estate sector has hit Indian Railways’ efforts to lease out surplus land for commercial development on public-private partnership.
Last week, the Railway Land Development Authority (RLDA) cancelled the bidding process for developing a private residential complex at Sarai Rohilla in Delhi. A senior official at RLDA said, “The developer at Sarai Rohilla was repeatedly deferring the date for making the upfront payment for the plot. We have decided to drop the tender for the project.”
The site, spread over 11 hectares, had been offered last April for constructing a residential complex with facilities such as a shopping complex and health care centres. The reserve price had been set at Rs 675 crore.
The official added, “Due to the credit crunch in the real estate sector, we are not being able to get the reserve price we are quoting for our plots. We have specifically decided to take a relook at the sites which had been identified for residential use. The matter is now under the consideration of the Railway Board.” This decision has also put a question mark on the 39-hectare residential complex project proposed at Nirala Nagar, Kanpur.
Plans to build retail space at Visakhapatnam in Andhra Pradesh have run aground, with the company which had won the contract forfeiting the bid security because it cannot go ahead with the purchase of the land. It is the same story at Bandra, Mumbai, where a 4.5-hectare plot had been put up for bids. RLDA had brought down the reserve price to Rs 3,960 crore from the initial Rs 4,628 crore at Bandra, but the project had found only one taker (DLF). The tender process there has now been put on hold, because of a dispute with local authorities on ownership.
Of the 12 sites, spanning 80 hectares, a development agreement has been signed for a solitary location at Gwalior. Commercial real estate development, which includes facilities for organized retail, shopping malls, food plazas and an entertainment zone, is being considered for the site.
Another agreement is expected to be concluded soon for constructing hospitality and retail spaces at Bangalore. RLDA expects to rake in about Rs 60 crore from a one-time upfront payment from developers at these two locations.
RLDA had been set up in 2007 to commercially develop the surplus and unused land with the railways. Till date, from the 43,000 hectares in the railway land bank, 133 sites, spanning 1,500 hectares, have been entrusted to it by the ministry. Consultancy work for 51 sites is in progress, while another 70 plots are under inspection. However, with the real estate sector continuing to remain in the red, the projects have not made much headway.
FDI inflows soar 60% in Nov at $1.74 b
FDI inflows soar 60% in Nov at $1.74 b
The Hindu Business Line, December 25, 2009, Page 1
Draft compendium of foreign policy issued.
Our Bureau, New Delhi
India attracted foreign direct investment (FDI) inflows of $1.74 billion during November 2009, a 60 per cent increase over the $1.08 billion notched in same month last year.
Clarity in rules
To give a further fillip to FDI, the Minister of Commerce and Industry, Mr Anand Sharma, has released a draft document that consolidates foreign investment policy notified through a slew of Press Notes by the Department of Industrial Policy and Promotion (177 to be precise) and various Reserve Bank of India circulars, into a single regulatory framework.
The consolidated framework is aimed at providing a greater clarity on the existing rules to foreign investors, but will not alter the current FDI norms or sector specific caps, he said.
“FDI in November has been substantially higher and we hope this trend continues,” the Minister said adding that the Government expects to attract substantial amount of foreign direct investments in the current fiscal.
On a cumulative basis, the FDI inflows remained almost flat at $19.38 billion in April-November 2009 compared with $19.79 billion in the year-ago period.
Amid the global credit crunch, it is the second month in a row that the inflows have posted an impressive growth. October witnessed a 56 per cent year-on-year jump in FDI at $2.33 billion.
In top five
The Minister said that FDI equity inflows as a percentage of GDP has grown from 0.75 per cent in 2005-06 to nearly 2.49 per cent in 2008-09. In fact, the World Investment Report 2009 has placed India in the list of top five most attractive locations for FDI for 2009-11, alongside China, the US, Brazil and the Russian Federation, he said.
Also, the 2009 survey of the Japan Bank for International Cooperation conducted among Japanese investors continues to rank India as the second most promising country for overseas business operations, after China.
Private bank ownership
On the contentious issue of certain private sector banks being categorised as foreign-owned under new FDI norms notified in February 2009, Mr Sharma said his Ministry was in active discussion with Finance Ministry and the RBI on the matter.
The FDI norms had signalled a problem for banks such as ICICI Bank and HDFC Bank as their ADRs (American depositary receipts), GDRs (global depositary receipts), and FCCBs (foreign currency convertible bonds) would also be considered as foreign investment while calculating the ownership.
The Press Note 2 of 2009 stipulates that foreign investment channelised through an investing Indian entity (owned and controlled by resident Indians) will not be taken into consideration for calculation of indirect foreign investment. It has defined Indian-owned company as one where resident Indian citizens or Indian entities have over 50 per cent stake.
Conversely, if the investing company is owned or controlled by non-resident entities, its entire downstream investment into the subject company would be taken as indirect foreign investment. RBI has been opposing these norms since they will change the classification of many banks to foreign banks. Seven private sector banks ICICI Bank, HDFC Bank, Yes Bank, Indus Ind Bank, Federal Bank, ING Vysya, and Development Credit Bank face the risk of a changed categorisation.
“There is this issue about ownership of certain banks which have a substantial foreign holding but are perceived as Indian banks…Active discussions are on between Finance Ministry, Ministry of Commerce and Industry, and RBI in this regard. The final view will be taken soon,” Mr Sharma said but did not give a timeframe.
Supertech to invest Rs 2,500 cr in UP
Supertech to invest Rs 2,500 cr in UP
The Hindu Business Line, December 28, 2009, Page 11
Realty firm Supertech today said it will invest about Rs 2,500 crore over the next four years to develop its various ongoing projects in Uttar Pradesh and Uttaranchal.
"We have more than ten projects in hand comprising group housing, integrated townships, hotels and shopping malls," Supertech Chairman and Managing Director R K Arora said.
These projects are located in Noida, Greater Noida, Ghaziabad, Meerut, Rudrapur, Moradabad and Haridwar.
Asked about the cost incurred on these projects, Arora said it would be about Rs 2,500 crore, including land, construction and other expenses.
The Noida-based firm will fund 50 per cent of investments through debt, he said, adding that the remaining would be managed through internal accruals and advances from customers.
Supertech is also looking at raising funds from private equity for its 51-acre integrated township at Meerut.
The Hindu Business Line, December 28, 2009, Page 11
Realty firm Supertech today said it will invest about Rs 2,500 crore over the next four years to develop its various ongoing projects in Uttar Pradesh and Uttaranchal.
"We have more than ten projects in hand comprising group housing, integrated townships, hotels and shopping malls," Supertech Chairman and Managing Director R K Arora said.
These projects are located in Noida, Greater Noida, Ghaziabad, Meerut, Rudrapur, Moradabad and Haridwar.
Asked about the cost incurred on these projects, Arora said it would be about Rs 2,500 crore, including land, construction and other expenses.
The Noida-based firm will fund 50 per cent of investments through debt, he said, adding that the remaining would be managed through internal accruals and advances from customers.
Supertech is also looking at raising funds from private equity for its 51-acre integrated township at Meerut.
‘Inflation could be 7% by Mar-end’
‘Inflation could be 7% by Mar-end’
The Financial Express, December 28, 2009, Page 1
MK VENU, KG Narendranath
Prime Minister’s Economic Advisory Council chairman C Rangarajan has spoken to FE on a range of macro-economic issues — from money supply growth to the need for concerted inflation management by the government and the central bank. He expressed the hope that Budget 2010 would maintain “adequate level of fiscal stimulus” for 8%-plus growth, but said fiscal deficit in 2010-11 should be brought below this year’s estimated 6.8%. He urged RBI and Sebi to take leadership in making financial markets deeper and diverse, particularly with robust debt instruments. Rangarajan also saw the government taking decisive action to pare the subsidy bills.
You have advised RBI to take monetary policy action in the wake of the nearly 20% food inflation which, it is feared, is already beginning to cause a generalised inflationary tendency.
What I have said is that, to reduce liquidity, RBI might need to raise the cash reserve ratio (CRR) after observing the price behavior till December-end. It could later consider the need for raising the other policy rates as well, depending on the situation. Usually, a new year brings about some seasonal decline in food prices.
Of course, in a situation like this, the primary action should be on the supply side. An effort must be made through appropriate policy action to increase the availability of food and bolster the distribution system.
At the same time, there is a need to ensure that the aggregate monetary demand is not excessive. We should not let money supply abet price increase. So, while I give the primary role in inflation management to the supply-side measures, it is important that the aggregate monetary demand is kept under some control. Some increase in CRR might be warranted, both as a signal and as a measure to reduce liquidity in the system.
The rate of growth of money supply has been high in the last several years. In the last three years, money supply increased by more than 20%. To some extent, the Market Stabilisation Scheme operations have played a role in managing liquidity, sometimes by draining it, but also by injecting liquidity when needed.
Despite these measures, there has been a substantial overall increase in money supply in the last four or five years. This year’s RBI target for money supply growth is 17%. But I think it is running at a level slightly higher than that rate. Therefore, some action by way of the adjustment of the CRR seems warranted.
Even if prices remain at current levels, the average inflation for January and February could be as high as 7.5% and 8.1%, respectively, on account of the base effect. How does this concern the policymakers?
It is true that the year-on-year inflation will keep increasing because of the base effect. However, the build-up of inflation from the end of March this year has already exceeded 7.5%. Therefore, unless there is some decline in prices by December, the overall inflation by March 2010 would be over 7%. The point is that if for any reason the index does not increase, it could be 7%.
Emerging economies like India would continue to face the prospect of huge capital inflows in the medium-term given the likelihood high growth. Isn’t there a need for a more stable policy to address capital inflows?
We had examined this (the issues concerning capital inflows) in our October outlook. Capital flows are now at comfortable levels and we do need them to bolster growth. We had estimated that gross inflow could be around $55 billion this fiscal, which means after financing the current account deficit of some $25 billion, there will be net addition to RBI’s foreign exchange reserves to the tune of $30 billion. We think that estimate would still hold true.
At the current levels, capital influx would not pose any serious problem to the monetary authority. Of course, it would have an impact on the exchange rate, but a $30 billion net addition to the RBI reserves is reckoned to be manageable.
You may recall that the rupee depreciated to very large extent last year, so a bit of correction, that is, some degree of appreciation, is not unacceptable. Real effective exchange rate is slightly above 100% now. It would possibly remain at that level. The capital flows would not put any extraordinary pressure on the rupee.
Don’t you see the need for greater coordination between fiscal and monetary authorities to make it easier for central bank to control inflation? What are the reform-related measures that the government must take to help RBI in inflation management?
For the monetary authority to manage the situation better, the fisc should not be too loose. In the coming year, an effort must be made to move towards the process of fiscal consolidation. It is necessary to reduce the fiscal deficit from 6.8% of GDP (the budget estimate for this year) to a lower figure. Some expenditure heads which were special to this year like payment of Pay Commission arrears to public sector employees would not be there next year.
The government will also have to take a call on how to deal with subsidies. There has been some moderation in crude oil prices over the past year and so the subsidy bill be lower than last year’s but would still be at a high level. I think it (subsidy management) is an issue attracting the attention of the government. Some steps need to be taken urgently to curtail the subsidy.
There is a view that food inflation sometimes exerts a disproportionate impact on other policy-making functions. A key problem is the profiteering on the part of the intermediaries as is evident from the fact that urban retail prices of unprocessed food items are up to 6 times the prices at the wholesale mandi level.
In the case of commodities that are procured by the government, the problem of intermediaries reaping unreasonable profits is less as farmers get the support price. This is not only true of cereals, pulses, sugar and oil, but also of perishables. In the case of other commodities, there is, of course, a substantial difference between what the farmers get and what the consumers have to pay.
Therefore, the medium-term policy focus should be on improving the distribution system with respect to the food items. Major retailers should go to the village and buy goods directly from farmers. In the case of perishables, there is a need to build the appropriate supply chains. Cold storages are extremely critical. Big private retailers could take the initiative and set up these chains, as most producers (small farmers) would find it difficult.
Producers’ cooperatives can also play a meaningful role in strengthening the distribution network for perishable agriculture commodities.
The proposed Goods & Services Tax (GST) is expected to reduce costs of businesses.
GST must primarily be seen as a better tax collection system. It is doubtless a good substitute for the existing system of excise duties and multiple local taxes. If we widen the tax base to include almost all commodities and services, the rate of tax would indeed come down.
Currently, only selectservices are taxed. It is important to have good (comprehensive) definition of services for taxation purpose.
The finance minister has underlined the need for the fiscal stimuli to run through the economy before they are withdrawn. Do you think the Budget 2009 would roll back part of the stimuli -- at least in terms of reversing the tax cuts?
The Budget 2010, I hope, would maintain adequate stimulus for the higher level of growth (8% plus) next year. In my view, one key aspect that needs to be watched of the Budget is how it would spell out the plan to bring about a reduction in fiscal deficit as part of a medium-term fiscal correction exercise. Clearly, the deficit of the kind that we’re now having is not sustainable as its persistence would exacerbate the debt-to-GDP ratio. Interest payments as proportion of the GDP could also start rising.
Perhaps, we would not be able to go back to the original FRBM path early enough. It could take some years. But despite that, we need to have a responsible medium-term strategy.
I’ve already mentioned about the action need to be taken on the subsidy front. Next year would also see a relative lessening of the onus on the fisc, with the absence of any special expenditure items like pay commission backlogs.
Tax reform is a potent instrument for tightening the fisc. I think Budget 2010 would not directly address the Direct Tax Code as more discussions are needed on this radical reform over the next year.
As for the GST, expectations are that if not at the beginning of the next fiscal year, it would be introduced at least towards the end of the year. In any case, this new indirect tax system would not be delayed beyond April 2011.
In your October review, you said the GDP growth this fiscal would be 6.5%. However, of late, there has been more optimistic estimate from the government.
The overall GDP growth rate this fiscal could be around 7% or, perhaps, a little more than 7%.
What is your forecast of inflation in 2010-11?
It is reasonable to assume that inflation would come down next year. Year-on-year inflation (wholesale price index) measured on a monthly basis could come down to around 5% by the end of next year. Growth rate would be stronger next year which would also witness a revival of agriculture and a consequent decline in food prices.
However, a significant risk factor is the uncertainty over the global crude oil prices. A surge in global commodity prices can adversely impact India. Thankfully, there is hardly any forecast of a major spurt in oil prices in 2010-11, as the developed economies that are coming out of the recession, would at best have a very-low-positive growth rate, 1-2% or so.
You have repeatedly emphasized the importance of accelerating the rate of growth power generation. Would the 11 th Plan capacity addition target for the electricity sector be met?
For the first two years of the Plan, shortfalls were reported. It is likely that there would be a shortfall in the third year (the current year) also. So, we would need to organize ourselves to make up for the shortfalls and meet the target, with the capacities to be created in the last two years of the Plan period.
I’m happy to note that certain initiatives have already been made in this direction. One of the constraints has been the inadequate (and delayed) supply of generation equipment. BHEL has already enhanced its capacities, so have a few private players too. Excessive reliance on imported equipment is not desirable. We need to ensure, through appropriate policy action, that the domestic availability of power generation equipment is substantially enhanced.
Why does the government keep a low pace when it comes to financial sector reforms?
Legislative action is already underway in this regard with the pension, insurance and banking bills being tabled in Parliament. These bills must be quickly passed.
Simultaneously, there is a need for regulatory initiatives to improve the efficacy of the financial sector in its totality. We need to create new products and new markets. In the industrially advanced economies, debt markets are well-developed. We need to have robust debt market to facilitate the flow of credit to medium and small industries. Either RBI or Sebi should take the leadership role in developing the debt markets.
The Financial Express, December 28, 2009, Page 1
MK VENU, KG Narendranath
Prime Minister’s Economic Advisory Council chairman C Rangarajan has spoken to FE on a range of macro-economic issues — from money supply growth to the need for concerted inflation management by the government and the central bank. He expressed the hope that Budget 2010 would maintain “adequate level of fiscal stimulus” for 8%-plus growth, but said fiscal deficit in 2010-11 should be brought below this year’s estimated 6.8%. He urged RBI and Sebi to take leadership in making financial markets deeper and diverse, particularly with robust debt instruments. Rangarajan also saw the government taking decisive action to pare the subsidy bills.
You have advised RBI to take monetary policy action in the wake of the nearly 20% food inflation which, it is feared, is already beginning to cause a generalised inflationary tendency.
What I have said is that, to reduce liquidity, RBI might need to raise the cash reserve ratio (CRR) after observing the price behavior till December-end. It could later consider the need for raising the other policy rates as well, depending on the situation. Usually, a new year brings about some seasonal decline in food prices.
Of course, in a situation like this, the primary action should be on the supply side. An effort must be made through appropriate policy action to increase the availability of food and bolster the distribution system.
At the same time, there is a need to ensure that the aggregate monetary demand is not excessive. We should not let money supply abet price increase. So, while I give the primary role in inflation management to the supply-side measures, it is important that the aggregate monetary demand is kept under some control. Some increase in CRR might be warranted, both as a signal and as a measure to reduce liquidity in the system.
The rate of growth of money supply has been high in the last several years. In the last three years, money supply increased by more than 20%. To some extent, the Market Stabilisation Scheme operations have played a role in managing liquidity, sometimes by draining it, but also by injecting liquidity when needed.
Despite these measures, there has been a substantial overall increase in money supply in the last four or five years. This year’s RBI target for money supply growth is 17%. But I think it is running at a level slightly higher than that rate. Therefore, some action by way of the adjustment of the CRR seems warranted.
Even if prices remain at current levels, the average inflation for January and February could be as high as 7.5% and 8.1%, respectively, on account of the base effect. How does this concern the policymakers?
It is true that the year-on-year inflation will keep increasing because of the base effect. However, the build-up of inflation from the end of March this year has already exceeded 7.5%. Therefore, unless there is some decline in prices by December, the overall inflation by March 2010 would be over 7%. The point is that if for any reason the index does not increase, it could be 7%.
Emerging economies like India would continue to face the prospect of huge capital inflows in the medium-term given the likelihood high growth. Isn’t there a need for a more stable policy to address capital inflows?
We had examined this (the issues concerning capital inflows) in our October outlook. Capital flows are now at comfortable levels and we do need them to bolster growth. We had estimated that gross inflow could be around $55 billion this fiscal, which means after financing the current account deficit of some $25 billion, there will be net addition to RBI’s foreign exchange reserves to the tune of $30 billion. We think that estimate would still hold true.
At the current levels, capital influx would not pose any serious problem to the monetary authority. Of course, it would have an impact on the exchange rate, but a $30 billion net addition to the RBI reserves is reckoned to be manageable.
You may recall that the rupee depreciated to very large extent last year, so a bit of correction, that is, some degree of appreciation, is not unacceptable. Real effective exchange rate is slightly above 100% now. It would possibly remain at that level. The capital flows would not put any extraordinary pressure on the rupee.
Don’t you see the need for greater coordination between fiscal and monetary authorities to make it easier for central bank to control inflation? What are the reform-related measures that the government must take to help RBI in inflation management?
For the monetary authority to manage the situation better, the fisc should not be too loose. In the coming year, an effort must be made to move towards the process of fiscal consolidation. It is necessary to reduce the fiscal deficit from 6.8% of GDP (the budget estimate for this year) to a lower figure. Some expenditure heads which were special to this year like payment of Pay Commission arrears to public sector employees would not be there next year.
The government will also have to take a call on how to deal with subsidies. There has been some moderation in crude oil prices over the past year and so the subsidy bill be lower than last year’s but would still be at a high level. I think it (subsidy management) is an issue attracting the attention of the government. Some steps need to be taken urgently to curtail the subsidy.
There is a view that food inflation sometimes exerts a disproportionate impact on other policy-making functions. A key problem is the profiteering on the part of the intermediaries as is evident from the fact that urban retail prices of unprocessed food items are up to 6 times the prices at the wholesale mandi level.
In the case of commodities that are procured by the government, the problem of intermediaries reaping unreasonable profits is less as farmers get the support price. This is not only true of cereals, pulses, sugar and oil, but also of perishables. In the case of other commodities, there is, of course, a substantial difference between what the farmers get and what the consumers have to pay.
Therefore, the medium-term policy focus should be on improving the distribution system with respect to the food items. Major retailers should go to the village and buy goods directly from farmers. In the case of perishables, there is a need to build the appropriate supply chains. Cold storages are extremely critical. Big private retailers could take the initiative and set up these chains, as most producers (small farmers) would find it difficult.
Producers’ cooperatives can also play a meaningful role in strengthening the distribution network for perishable agriculture commodities.
The proposed Goods & Services Tax (GST) is expected to reduce costs of businesses.
GST must primarily be seen as a better tax collection system. It is doubtless a good substitute for the existing system of excise duties and multiple local taxes. If we widen the tax base to include almost all commodities and services, the rate of tax would indeed come down.
Currently, only selectservices are taxed. It is important to have good (comprehensive) definition of services for taxation purpose.
The finance minister has underlined the need for the fiscal stimuli to run through the economy before they are withdrawn. Do you think the Budget 2009 would roll back part of the stimuli -- at least in terms of reversing the tax cuts?
The Budget 2010, I hope, would maintain adequate stimulus for the higher level of growth (8% plus) next year. In my view, one key aspect that needs to be watched of the Budget is how it would spell out the plan to bring about a reduction in fiscal deficit as part of a medium-term fiscal correction exercise. Clearly, the deficit of the kind that we’re now having is not sustainable as its persistence would exacerbate the debt-to-GDP ratio. Interest payments as proportion of the GDP could also start rising.
Perhaps, we would not be able to go back to the original FRBM path early enough. It could take some years. But despite that, we need to have a responsible medium-term strategy.
I’ve already mentioned about the action need to be taken on the subsidy front. Next year would also see a relative lessening of the onus on the fisc, with the absence of any special expenditure items like pay commission backlogs.
Tax reform is a potent instrument for tightening the fisc. I think Budget 2010 would not directly address the Direct Tax Code as more discussions are needed on this radical reform over the next year.
As for the GST, expectations are that if not at the beginning of the next fiscal year, it would be introduced at least towards the end of the year. In any case, this new indirect tax system would not be delayed beyond April 2011.
In your October review, you said the GDP growth this fiscal would be 6.5%. However, of late, there has been more optimistic estimate from the government.
The overall GDP growth rate this fiscal could be around 7% or, perhaps, a little more than 7%.
What is your forecast of inflation in 2010-11?
It is reasonable to assume that inflation would come down next year. Year-on-year inflation (wholesale price index) measured on a monthly basis could come down to around 5% by the end of next year. Growth rate would be stronger next year which would also witness a revival of agriculture and a consequent decline in food prices.
However, a significant risk factor is the uncertainty over the global crude oil prices. A surge in global commodity prices can adversely impact India. Thankfully, there is hardly any forecast of a major spurt in oil prices in 2010-11, as the developed economies that are coming out of the recession, would at best have a very-low-positive growth rate, 1-2% or so.
You have repeatedly emphasized the importance of accelerating the rate of growth power generation. Would the 11 th Plan capacity addition target for the electricity sector be met?
For the first two years of the Plan, shortfalls were reported. It is likely that there would be a shortfall in the third year (the current year) also. So, we would need to organize ourselves to make up for the shortfalls and meet the target, with the capacities to be created in the last two years of the Plan period.
I’m happy to note that certain initiatives have already been made in this direction. One of the constraints has been the inadequate (and delayed) supply of generation equipment. BHEL has already enhanced its capacities, so have a few private players too. Excessive reliance on imported equipment is not desirable. We need to ensure, through appropriate policy action, that the domestic availability of power generation equipment is substantially enhanced.
Why does the government keep a low pace when it comes to financial sector reforms?
Legislative action is already underway in this regard with the pension, insurance and banking bills being tabled in Parliament. These bills must be quickly passed.
Simultaneously, there is a need for regulatory initiatives to improve the efficacy of the financial sector in its totality. We need to create new products and new markets. In the industrially advanced economies, debt markets are well-developed. We need to have robust debt market to facilitate the flow of credit to medium and small industries. Either RBI or Sebi should take the leadership role in developing the debt markets.
Economy responding positively to reforms; set to grow by little over 7%, says PM
Economy responding positively to reforms; set to grow by little over 7%, says PM
The Financial Express, December 28, 2009, Page 2
fe Bureaus, Bhubaneswar
Prime Minister Manmohan Singh on Sunday defended the economic reform programmes of the country stating that the new policies have had a positive effect on the general economy of the country.
Despite the global meltdown, India will achieve at least 7% growth this year, Singh said while addressing the 92nd Indian Economic Association (IEA) annual conference.
Those who claimed that the new polices would have an adverse effect on growth or the balance payments were clearly wrong, Singh asserted. He said there is no evidence that the new economic policies have had an adverse effect on the poor of the country. He also said the percentage of population below the poverty line has certainly not increased. In fact, it has continued to decline after economic reforms, he observed.
This phenomenon is contrary to critics' arguments that the new policies would make the rich richer and the poor poorer and the percentage of population below poverty line would increase, others focused on a possible worsening of urban-rural differentials and regional inequalities.
The prime minister, however, said poverty remained a major challenge and “we need to do much more to improve the standard of living of the poor who are still too poor and to end this the economy has to grow fast enough to create new job opportunities at a rate faster than the growth of the labour force.” “Our goal is inclusive growth and this has been explicitly enshrined in the 11th Five Year Plan and to achieve the objective of inclusive growth we need to pay much greater attention to education, health care and rural development focusing particularly on the needs of the poor,” he said. The PM said while it was true that the rate of decline of poverty has not been faster, he added that “there is no doubt that it has declined.”
He said all discussion on trends in poverty is based on the NSS survey date and the latest large sample estimate of the NSS is available only for 2004-2005.
“We do not as yet have the next large sample estimate for 2009-2010 which should be available a year from now,” the Prime Minister said, adding that “since the period of rapid growth of the economy was largely after 2004-2005, we will have to wait for a year to know its impact on the poor.” Singh said special attention has to be paid on increasing agricultural productivity particularly of small and marginal farmers. In industry, more systematic efforts have to be made to help small firms in mobilising resources of governance so as to reduce the scope of corruption, lower transaction costs of starting a new business and create en environment conducive to promotion of innovation.
The Financial Express, December 28, 2009, Page 2
fe Bureaus, Bhubaneswar
Prime Minister Manmohan Singh on Sunday defended the economic reform programmes of the country stating that the new policies have had a positive effect on the general economy of the country.
Despite the global meltdown, India will achieve at least 7% growth this year, Singh said while addressing the 92nd Indian Economic Association (IEA) annual conference.
Those who claimed that the new polices would have an adverse effect on growth or the balance payments were clearly wrong, Singh asserted. He said there is no evidence that the new economic policies have had an adverse effect on the poor of the country. He also said the percentage of population below the poverty line has certainly not increased. In fact, it has continued to decline after economic reforms, he observed.
This phenomenon is contrary to critics' arguments that the new policies would make the rich richer and the poor poorer and the percentage of population below poverty line would increase, others focused on a possible worsening of urban-rural differentials and regional inequalities.
The prime minister, however, said poverty remained a major challenge and “we need to do much more to improve the standard of living of the poor who are still too poor and to end this the economy has to grow fast enough to create new job opportunities at a rate faster than the growth of the labour force.” “Our goal is inclusive growth and this has been explicitly enshrined in the 11th Five Year Plan and to achieve the objective of inclusive growth we need to pay much greater attention to education, health care and rural development focusing particularly on the needs of the poor,” he said. The PM said while it was true that the rate of decline of poverty has not been faster, he added that “there is no doubt that it has declined.”
He said all discussion on trends in poverty is based on the NSS survey date and the latest large sample estimate of the NSS is available only for 2004-2005.
“We do not as yet have the next large sample estimate for 2009-2010 which should be available a year from now,” the Prime Minister said, adding that “since the period of rapid growth of the economy was largely after 2004-2005, we will have to wait for a year to know its impact on the poor.” Singh said special attention has to be paid on increasing agricultural productivity particularly of small and marginal farmers. In industry, more systematic efforts have to be made to help small firms in mobilising resources of governance so as to reduce the scope of corruption, lower transaction costs of starting a new business and create en environment conducive to promotion of innovation.
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