The Narendra Modi government might need to relax the fiscal deficit target for the year, and the Reserve Bank of India should cut interest rates by 100 basis points to revive economic growth, the Confederation of Indian Industry (CII) said on Friday.
The CII also said there should be interventions for depreciation of the rupee-dollar exchange rate to boost exports and a greater push towards bank recapitalisation to shore up credit growth.
“There may be a need to relax the fiscal deficit targets to accommodate stimulus measures, particularly for job-creating sectors. The Fiscal Responsibility and Budget Management (FRMB) Act permits a deviation of 0.5 per cent of gross domestic product (GDP) on account of exceptional circumstances. Introduction of the historical tax reform of the goods and service tax (GST) calls for adjustment time,” said the statement.
“A cut in interest rates would encourage domestic demand in sectors such as affordable housing, consumer durables and construction. Interest rate subvention in sectors such as exports, housing and medium and small enterprises would also help raise growth,” it said.
On the GST front, CII recommended procedural changes to ease administrative processes, including allowing C Form set-off, addressing reverse charges, mismatches of higher rates on inputs and lower rates on final goods, and grandfathering of existing regional incentives, among others.
“CII has also highlighted the need for bank recapitalisation for enabling credit growth to revive the economy. The government may consider lowering its stakes in public sector banks for this purpose,” the statement said.
There is also urgency regarding reforms in the labour regulations, said the CII. Fixed term employment and fiscal incentives for creation of incremental jobs would help new employment generation. In the longer term, it is important to simplify and address labour laws for creating better quality jobs.
As reported in Business Standard earlier, the centre is said to be actively considering expansion of public spending even at the cost of fiscal deficit. There have been discussions at the higher levels of government to raise resources to finance higher capital spending, beyond the budgeted Rs 3.10 lakh crore for 2017-18.
Top policymakers are said to have discussed whether marquee disinvestment plans like Air India can be completed this year itself, and whether the centre should borrow more from the market. There were also methods of non-fiscal stimulus discussed, including more infrastructure bonds issued by central agencies like the NHAI, and recapitalizing banks through either bond issuances or the centre offloading its stake in state-owned lenders
GDP growth for the April-June quarter fell to 5.7 per cent, due to demonetization and destocking by companies following pre-goods and services tax (GST) jitters. With this, India lagged China in terms of growth in gross domestic product (GDP) for the second consecutive quarter. The Chinese economy expanded 6.9 per cent in each quarter. GDP growth is down from 7.9 per cent in April-June 2016-17.
Growth in manufacturing declined to 1.2 per cent in April-June, from 5.3 per cent in January-March. Mining and quarrying contracted 0.7 per cent during the quarter, after growing 6.4 per cent in the previous quarter. Agriculture growth lost pace at 2.3 per cent, against 5.2 per cent in the previous quarter, and 6.9 per cent in October-December of 2016-17. This was despite crop production growing, even as livestock could not keep pace.