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Manmohan assures action on the reforms front

Says India needs portfolio investments & FDI, says fiscal & trade deficits to be curbed, rupee to be stabilised

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As India's macro-economic parameters cry for reforms, Prime Minister has assured investors that his government will fix policy impediments in the way of foreign investments and trim the fiscal and trade deficits to put the country back on a high growth trajectory.

He sought the help of all political parties and states to put the economy back on a high growth path of at least seven per cent for this financial year against the nine-year low of 6.5 per cent in 2011-12.

Returning to New Delhi from the meetings in Mexico and the in Brazil, he told reporters, "There are problems with regard to fiscal management. We will tackle that problem effectively and credibly. There are problems with regard to management of the balance of payments, on the current account deficit. Those problems also we will tackle."

SOLVING PROBLEMS
  • PM says will take decisions to trim twin deficits to woo investments
  • Says steps will also stabilise the rupee
  • Assures India has sufficient food stocks to meet semi-drought situation

He hoped these would also bring back the rupee’s value against the dollar, down to an all-time low of 57.37 in intra-day trading on Friday, to a more stable path.

The market and industry buzz is that customs duty on certain products will be raised tomorrow to curb the fiscal and current account deficits and to strengthen the rupee.

Singh's comments came on the heels of Finance Minister announcing in Birbhum in West Bengal that he would announce tough measures on Monday to tackle problems faced by the economy. The central government's fiscal deficit zoomed to 5.7 per cent of GDP in 2011-12 against optimistic budget estimates of 4.6 per cent. For this year, the deficit is projected to be reined at5.1 per cent of GDP.

The current account deficit widened to a record four per cent of GDP in the first nine months of 2011-12. Even in the balance of payments crisis period at the beginning of the 1990s, this deficit was three per cent of GDP, though other parameters like forex reserves and short-term debts were weaker.


Singh said steps would also be taken to attract foreign investments. "We need both, portfolio and direct (investment). If there are any obstacles which come in the way and if there are any policy impediments, we will address those problems effectively and credibly," Singh said.

His response was to a query over retrospective amendments to the vitiating atmosphere for foreign direct investment and rating agencies like Standard & Poor's and Fitch Ratings warning India on a downgrade. Singh, however, did not specify retrospective amendments in his answer.

Analysts, however, said the PM had been saying all this on reforms for the past year and his words should be followed by action. Jagannadham Thunuguntla, head of research at SMC Global Securities, said," A lot has been said about hiking the FDI cap in insurance to 49 per cent from the current 26 per cent, and allowing FDI in domestic carriers, but nothing has happened so far. The two steps alone could garner $30-40 bn over the years."

Fitch Ratings senior director Devendra Pant said action will have to be taken on a whole lots of things to improve the situation. "The FDI cap has to be hiked in certain sectors like insurance and allowed in others like multi-brand retail," he added.

Swedish furniture maker IKEA had yesterday approached the government with a proposal to invest the equivalent of Rs 10,000 crore to set up 25 stores in the country. If the multi-brand retail sector was also opened for FDI, lots of things could be streamlined, including putting a dampening impact on food inflation, Pant said.

Growth
Singh refused to specify the steps the government would take, but said he was serious about putting India into a high growth trajectory. "It will not be proper for me to talk about these things in detail, but you have my assurance that I recognise we have to work our way to restore the momentum of growth that India needs and which the people of India want the Government of India to work for... I am still confident the growth rate of the economy in the rest of the year will improve to about seven per cent."

The PM said many problems in the economy originated outside India. "The 2008 financial crisis affected our growth rate. Our growth rate fell from nine per cent to 6.7 per cent (in 2008-09) and we recovered in the next two years (the economy grew 8.4 per cent in 2009-10 and 2010-11 each), but then came the Euro zone crisis and therefore there is a flight of capital from a large number of developing countries," Singh said.

He said capital in search of safety wanted to go to Germany, the US, etc, and all developing countries were experiencing a deceleration of growth.

He agreed there were problems within the country, too. "We have to work harder than ever before in restoring the fiscal balance. We have to work systematically to ensure the balance of payments problem is managed properly and the climate for foreign investment, both direct and portfolio, is also favourably motivated."

He asked all political parties and states to work with the government to restore the momentum of growth.

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