Higher growth possible through tax cuts, further monetary easing: CII

The Confederation of Indian Industry (CII) has called for a further reduction in interest rates, moderation in the prices of essential commodities such as food and fuel as well as a reduction in indirect tax rates to drive economic growth further in 2009-10.

The Indian economy slowed down considerably during the second half of 2008-09 in the wake of the global financial meltdown as well as a cyclical downturn in the domestic economy, CII said in a report on the state of the economy released today.

CII expects a recovery also to be driven by the rural demand, which remains strong in view of the good performance of the agricultural sector.

"The fact that rural demand remains unaffected by global developments is a source of strength for the Indian economy", said Chandrajit Banerjee, director-general of CII.

CII is factoring in a base case of 6.1 per cent GDP growth in 2009-10. This scenario, factors in sectoral growth rates of 2.8-3.0 per cent for agriculture, 5.0-5.5 per cent for industry and 7.5-8.0 per cent for services.

A more decisive recovery will be possible through further monetary easing by cutting repo and reverse repo rates by at least 50 basis points, implementing large infrastructure projects and reviving confidence by ensuring a business-friendly environment, it said.

If these revival measures are implemented, the GDP growth during 2009-10 could be higher, CII said.

The CII study also used an analysis of the financial performance of 324 companies (173 in manufacturing and 151 in the services sector) for the quarter ended March 2009.

The study revealed that there has been a slowdown in sales growth and contraction in net profit in this quarter. Net sales grew 8.7 per cent during Q4 of 2008-09, compared to 23.7 per cent during previous quarter. The moderation in sales growth has been accompanied by a similar moderation in raw material costs, reflecting the decline in global commodity prices. As a result, net profits of the sample of companies contracted by 1.0 per cent during Q4 of 2008-09, a slight improvement compared to the contraction of 2.4 per cent in the previous quarter.

The CII release also pointed out that at a time when the global economy and global trade are projected to contract, it will be extremely important to maintain counter-cyclical fiscal and monetary policy.

''The drivers of economic growth have to come from domestic sources. The government, therefore, needs to maintain higher spending, especially in the creation of public assets. Monetary policy, in turn, needs to be supportive,'' it said, adding, "Any pressure on interest rates to rise at this juncture will crowd out private spending."

The global financial turmoil has resulted in a sharp decline in capital inflows into India. During April-December 2008, the balance of payments ran a deficit of $20.4 billion. The RBI's foreign exchange reserves declined by $57.4 billion during 2008-09, the release noted.

Although this decline has been arrested somewhat since March 2009, reflecting some revival in capital flows, policies are needed to ensure that India remains an attractive investment destination. In particular, the policy framework in India must remain conducive to attracting large FDI inflows, the release added.