RBI pushes for manufacturing boost

Says a thrust to the sector in the Budget can help absorb excess farm labour.

Amid decelerating manufacturing growth, the Reserve Bank wants the government to come out with measures in the Budget to give a boost to the sector, which can employ surplus labour from agriculture.

The suggestion was made by RBI Governor D Subbarao at a meeting of the Financial Stability and Development Council (FSDC), which met for the second time recently after its constitution last year, officials said.

However, none of the regulators expressed reservations over the FSDC’s functioning. The body had seen criticism from RBI and Sebi initially over one of its proposed roles, to coordinate between financial sector regulators.

The governor made the point of boosting manufacturing to highlight that agriculture, whose contribution to the national economy has declined substantially over the years, is still the largest employer in the economy. Agriculture’s share in the total national income has come down to a mere 15.77 per cent during the first half of this financial year, according to the latest data available. Growth in manufacturing output, which has the potential to generate large employment, has come down drastically in recent times. In the month of November, manufacturing growth declined to 2.3 per cent against 12.3 per cent a year ago. The industry itself is pitching for status quo in interest rates by RBI in its policy review on January 25, as it fears a rise in the cost of funds if the policy rates are raised.

RBI is widely expected to raise policy rates by at least 25 basis points to tame the rising inflation. Wholesale price-based inflation rose to 8.43 per cent in December from 7.48 per cent in the previous month on expensive food items, particularly onions.

Food inflation abated a bit in the early part of this month but still remained at a heightened level of 15.52 per cent during the week ended January 8.

At the meeting, the Finance Minister laid emphasis on striking a balance between boosting growth and curbing inflation.

The industry is pitching for a reduction in corporate rates to 25 per cent in the Budget from 30 per cent currently and the continuation of stimulus packages.

However, after meeting Finance Minister Pranab Mukherjee, industry representatives had said the minister did not seem to be in a mood to reduce rates, but was likely to continue with stimulus measures.

After the global financial crisis deepened following the collapse of US financial services icon Lehman Brothers in mid-September 2008, the government provided stimulus packages to the industry in three rounds. The packages included a cut in excise duty by six per cent, service tax by 2 per cent and stepping up of public expenditure.

After growth recovered partially to 7.4 per cent last year from 6.7 per cent a year ago, the finance minister partially rolled back the stimulus by raising excise duty by 2 per cent to 10 per cent on non-petroleum products, to revert to the path of fiscal consolidation.

The minister also sought inputs from regulators to keep the government on the path of fiscal consolidation and check the rising current account deficit, officials said. Despite, more than Rs 70,000 crore of additional mop-up from spectrum sale for high-speed telephony and broadband services, the government may just be able to rein in the fiscal deficit to a projected 5.5 per cent of GDP this financial year.

India’s current account deficit more than doubled to $27.9 billion in the first half of 2010-11, constituting 3.5 per cent of GDP. Despite the government’s optimism, the current account deficit may not be reined in to 3 per cent of GDP this financial year. Sebi Chairman C B Bhave, Irda chief J Harinarayan, PFRDA Chairman Yogesh Agarwal, finance secretary Ashok Chawla and financial services secretary R Gopalan also attended the meeting.