"The global economic recession is having an impact on the Indian economy and the manufacturing sector is already under stress", said Venu Srinivasan, President, CII at a press conference held today. He said that the level of uncertainty is currently high and CII's priority will be to work with the government on the revival of the economy. He said that some signs are emerging that the economy is stabilizing but acknowledged that India faces many challenges. In particular, he said that the challenges of building infrastructure and addressing governance issues are key. CII would like to highlight these areas in its policy work in the current year.
In 2009-10, the strength in rural income and the pay hikes for government employees will provide some stimulus to demand. However, uncertainty continues to be high about the performance of more than 70% of GDP that is contributed by industry (26% of GDP) and non-government services (44% of GDP), said the CII President. A CII analysis of quarterly performance of 2661 companies clearly shows that the growth in their net profit has fallen sharply from 22% growth in December 2007 to a decline of 25% in December 2008. Lack of demand and high interest and other costs including infrastructure costs has particularly put Indian manufacturing at about 15% cost disadvantage compared to their peers in other emerging economies, Mr Srinivasan said.
According to Mr. Srinivasan, the institution of GST would be a key step to the unification of the Indian market, and a necessity if Indian industry has to compete and survive in an era of FTAs and PTAs. CII would like an announcement on the detailed road map and framework of the GST that would be brought in. GST would be useful only if it is unified and industry has to deal with tax authorities at one location only. Similarly, CII would like to see freer movement of goods across state barriers and trade facilitation measures for cross-border trade. Reforming India's complex system of getting clearances and approvals from various levels of government is another priority.
On monetary intervention, the CII President said that the current inflation situation creates a huge and rare opportunity for the RBI to cut rates further. CII suggests that the RBI cut policy rates by 50 bps. However, this would only be effective if bond yields start reflecting the actual health of the economy. Currently, bond yields have increased because of the high level of borrowing announced by the government. CII feels that monetizing the deficit is the best option in the current circumstances. An announcement to this effect would ensure that private sector investments are not crowded out, Mr Srinivasan said.
In order to improve productivity in agriculture, Mr. Srinivasan said that government policy should move from providing subsidies to increasing its investment in rural infrastructure. Investments in rural infrastructure including irrigation, storage facilities, cold chains and rural roads would go a long way in addressing the structural deficiencies in the agriculture sector. In addition, supplementing public resources with private investment in technology will reach market information to farmers. This will help in price realization and on rational cropping pattern in agriculture. Agriculture needs to grow at 4% on a sustained basis to support the livelihoods of the large number of people dependent on agriculture. CII's policy advocacy would stress the importance of rejuvenating growth in agriculture.
In the manufacturing sector, CII would stress the importance of achieving a higher share in GDP for this sector. While manufacturing accounts for over 40% of GDP in China, in India it is less than 20%. The manufacturing sector is key for providing jobs to the large number of semi-skilled persons entering the work force every year. To achieve this, it is imperative to reduce the competitive disadvantages faced by Indian companies in relation to power and transportation infrastructure. The Government also needs to look at acquiring land systematically and transfer the same to industry in a transparent manner, the CII President said.
Briefing on the other thrust area of CII this year - infrastructure, the CII President said that India faces a huge infrastructure deficit and requires a massive investment. According to Mr Srinivasan, the first and the most critical point is that the Government needs to ramp up investment in infrastructure, immediately to 7% of the GDP and to 9% in the next 1-2 years time. To achieve this government requires to do two things; increase public spending substantially and at the same time create an investment conducive environment to encourage greater private sector participation in creation of infrastructure. The second aspect is improvement of delivery mechanism. There are whole host of issues ranging from bidding process to land acquisition and approvals and dispute resolutions, which cause delays in implementation. Third is urban infrastructure according to CII. Mr Srinivasan recommended that the Government must provide infrastructure status to Integrated Township Development. Fourth, according to his is low cost housing. Mr Srinivasan said that India needs to give special attention to low cost housing; there are several suggestions on the table today such as increase the municipal limits of existing cities to relaxation in the Floor Area Ratio (FAR) so as to release more land for housing purposes. Government has taken some steps in this direction. What is required is a consolidation and action at the state level.
Commenting on the issue of Governance, Mr Srinivasan said that much of good corporate governance is voluntary - of companies taking conscious decisions of going beyond the mere letter of law. CII has thus, set up a Task Force under the chairmanship of Mr Naresh Chandra to enunciate principles which would help listed companies take a voluntary step beyond clause 49 and also restore credibility of India Inc which has been misplaced due to the recent corporate scandal. "The new code would list principles for voluntary adoption by companies for improving corporate governance both in letter and spirit such as greater role for independent directors, more transparency in corporate affairs and more independence for the audit function" announced Mr Srinivasan. The Code would also address ambiguities in existing laws and regulations that would require some deal of regulatory intervention, he further added. CII would work towards endorsement of the new Code when it is released three weeks from now.
On the policy front, Mr Srinivasan said that CII would support both the Government and the Regulator in framing policy issues. CII would also represent for low cost of compliance since it is the cost of non-compliance which should be high so as to act as a deterrent.
