Government should consider lowering savings rate to revive investment: Harshavardhan Neotia

Interview with President, Federation of Indian Chambers of Commerce & Industry

The private sector is unable to step up investment due to stretched balance sheets and high lending rates, says Harshavardhan Neotia, president, Federation of Indian Chambers of Commerce and Industry. He tells Dilasha Seth the government should consider lowering of savings rates, to enable banks to pass on the rate cuts to consumers and business. Edited excerpts:

Your assessment of the economy? Is industry satisfied with the pace of reforms under the current regime?

I see a positive situation relative to a year before. The government has indeed made efforts in pushing the economic agenda, through reforms and initiatives. We can see some of those actions getting realised on the ground, particularly the large public sector investments in roads and railways. Ficci had said at the time of the government taking charge that the efforts will show results only  in the next 18 to 24 months, and we are now at that window. That’s generally an optimistic feel of how things are expected to unfold.

Lately, sections of the corporate sector feel the pace of reforms under the Modi government has slowed after the initial euphoria.

There was the headline-grabbing issue of GST (the proposed national goods and services tax), where a lot of political capital got invested and created a lot of expectation. It didn't happen, which led to some disappointment. India, in general, had very high and unrealistic expectations even in the run-up to (the 2014 Lok Sabha) elections. We are a large democracy, with history and legacies; it will take a while to make that change. We underestimated some of those challenges. Everyone wants a faster solution to everything.

Beside GST, what other reforms do you expect from the government in the coming financial year?

We would like the government to enable faster economic growth. We would like to see widening of the tax base, so the government can have fiscal space and result in moderation of tax rates. We have recommended that GST is one way of better financial inclusion. We’d also like the government to speed up disinvestment and recapitalise some banks, in view of rising NPAs (non-performing assets).

What exactly are your recommendations for widening the tax base?

People with an (annual) income over Rs 10 lakh, even if exempt from tax, should be assessed and file returns. The government’s effort to widen the scope of the PAN (income tax identity) card will ensure more people come under the tax net. Gradually, we should move from the present number of three per cent (of the population) of tax payers to five per cent.

While the government stays committed to higher capital spending, the finance minister has urged the private sector to start investing. What is holding back business?

India remains the best market in the world to invest in and there’s no reason why the private sector will not be investing. If they are not able to, that’s because their balance sheets might be stretched. Interest rates have been high. We have been constantly telling the government that interest rate moderation is very important, as consumers are also looking for lower EMIs (monthly payment instalments). For corporate borrowers, the cost of borrowing is very high. As interest rates fall, my appetite to borrow will increase and competitiveness will increase and my investment cycle will pick up. So, if an Indian enterprise is not investing, it is only because it is unable to.

We saw 125 basis points of cut in the repo rate in 2015.
That didn’t result in the full impact coming across in terms of lending rate cuts. Only 0.4 percentage points or so got transferred, as the savings rate continues to remain high. It is controlled by the government. If the government considers cutting the savings rate, banks be able to pass on the rate cut to the public. So, the Reserve Bank is the starting point but (their) repo rate reduction is not sufficient.