'Restoring the Growth Momentum and Bringing Back Investor

‘Restoring the Growth Momentum and Bringing Back Investor Confidence: FICCI’s Comprehensive Action Agenda’ November 3, 2008 Federation House, 1, Tansen Marg, New Delhi ‘Restoring the Growth Momentum and Bringing Back Investor Confidence: FICCI’s Comprehensive Action Agenda’ INDEX Introduction 2 Part 1 – Restoring Investor Confidence by Addressing Challenges in the Financial Sector 3 Part 2 – Addressing Challenges in the Real Sector Rejuvenating the Manufacturing sector SME Sector: A Sterling Employer Exports: Staring at Declining Fortune Infrastructure Shortfall - Needs to be Met Now Kick Starting the Housing Sector: Bring Back Consumer Confidence Conclusion 6 7 8 9 10 11 13 ‘ 1 Restoring the Growth Momentum and Bringing Back Investor Confidence: FICCI’s Comprehensive Action Agenda’ Introduction Growth so far has been primarily private investment led. The fundamental Indian economy remains structurally strong and the current international banking crisis has left the Indian banking sector relatively untouched. However, the many months of tight monetary policy and its consequent effect on drying up domestic liquidity had forced Indian companies to look externally for financing. This forced and increased international exposure has seriously compromised the Indian industry because of turmoil in the international financial markets and the rapid devaluation of the Indian Rupee. In addition the risk aversion that has suddenly crept into the domestic banking sector on account of the international banking crisis has created a situation of deep concern and threat for the real economy and all the players in it. While the steps of liquidity infusion, rate cuts and opening up ECBs are all welcome steps and aimed at restoring liquidity in markets - and had been suggested by FICCI a few months ago (anticipating a slowdown), these are not enough in the current circumstances and global scenario. As a matter of fact, the ECB opening up is a case of bolting the stable door after the horse has left. The reasons to take deeper and more meaningful measures is simple, India is in the middle of a significant investment and expansion cycle – where businesses need access to capital (equity and credit). Disruption of this expansion cycle mid-stream will have serious consequences to the real economy – serious, deep and systemic – which will come back and haunt us a few years down the road and will seriously compromise growth prospects for 2009-10, 2010-11 etc. Get the Focus back on Growth and Growth Alone. Due to global contractions, inflation will moderate by next year and so this continuing focus on inflation at the expense of growth is not necessary. Do not focus on stock market alone; focus on ‘Real Economy’. Part 1 of this document enlists the corrective measures for the financial sector, many of which have already been recommended and conveyed in the last few days. Part 2 of this document will address the real sector of the economy. We have particularly looked at those segments of the real sector that have major forward and backward linkages. ‘ 2 Restoring the Growth Momentum and Bringing Back Investor Confidence: FICCI’s Comprehensive Action Agenda’ Part 1 Restoring Investor Confidence by Addressing Challenges in the Financial Sector ‘ 3 Restoring the Growth Momentum and Bringing Back Investor Confidence: FICCI’s Comprehensive Action Agenda’ To bring normalcy in and streamline the functioning of the financial sector so that it supports the momentum in the real economy, FICCI would like to make the following suggestions. 1. Liquidity, rate cuts, risk aversion and sectoral stabilization fund FICCI believes that liquidity that has been infused into the market following the recent CRR cuts would be quickly absorbed to meet the outstanding commitments. Given this scenario it is important to inject a fresh dose of liquidity much ahead in time. Central bank must further bring down the CRR from the present 6.5% to 4.5% - the same level as was seen in the year 2004 Cut repo rate by another 100 basis points immediately and bring it down to 5% in the near term. This would send a strong signal to the banks to revise their PLR downwards. Cost of capital has gone up severely in the last one year. Bringing down rates especially for mortgages will spur growth in the economy Cut the bank rate by 100 basis points FICCI proposes sectoral stabalisation funds for sectors where risk aversion has suddenly shot up and liquidity is not forthcoming 2. Risk aversion and credit flows to small and medium sector as well as large projects, (Issues of crowding out by the Public sector and Subsidy bills) Banks must completely deliver on all sanctioned loan limits to corporates Crowding out of private sector from credit markets should not happen with liquidity being used for fertilizer and petroleum subsidies Bring down the reverse repo rate by 200 basis points. A lower reverse repo rate would act as a disincentive for banks to park liquidity with RBI Banks have stopped opening LCs against the sanctioned non-funded limits. The same should be restored immediately 3. Recapitalize banks – give them the Rs. 50,000 crore on agricultural loans immediately 4. Increase long term liquidity by providing long term Tier I and Tier II capital to banks 5. Provide dollars to banks and importers. There is a genuine shortage of dollars currently as global banks have pulled L/C lines for India importers 6. Protect against systemic defaults by NBFCs by converting them to Banks and bringing them under regulation 7. Bring the focus back on FDI and attract sovereign funds (SWFs) Government to lift foreign investment restrictions and review caps in sectors like insurance, telecom, multi-product retail and aviation There is ample capital available in Japan and Middle East. We should strategically set up bilateral funds flows for infrastructure investments in the country ‘ 4 Restoring the Growth Momentum and Bringing Back Investor Confidence: FICCI’s Comprehensive Action Agenda’ 8. Boost NRI deposits Deposit rate on FCNR and NRE to be increased by 50 basis points for all categories 9. Raise long-term money with a NRI bond issuance (like India Millennium Bonds). We can raise US$ 20-25 billion with this and augment our reserves 10. Make stock buybacks easier and simplify the requirements and process – so companies themselves can be buyers of the last resort ‘ 5 Restoring the Growth Momentum and Bringing Back Investor Confidence: FICCI’s Comprehensive Action Agenda’ Part 2 Addressing Challenges in the Real Sector ‘ 6 Restoring the Growth Momentum and Bringing Back Investor Confidence: FICCI’s Comprehensive Action Agenda’ Rejuvenating the Manufacturing sector Indian manufacturing sector contributes around 16% to the GDP of the country and has a share of around 13% in the total workforce, employing around 54 million people. The manufacturing sector in India has shown a steady growth in the last few years and has contributed significantly to the growth of the economy. The manufacturing sector grew by 9.1% for two consecutive years i.e. 2004-05 and 2005-06. The growth rate of the sector peaked in 2006-07 and achieved 12.5% growth. Causes for concern: • • • • • Tightening of the liquidity conditions and hardening of interest rates Rising cost of raw materials and industrial inputs Clear slowdown in the manufacturing sector in 2007-08 Manufacturing sector recorded 5.5% growth during April-August 2008 as compared to 10.6% for the same period last year Slowdown is widespread across all major sectors and is likely to continue Clearly, this calls for some immediate Government measures that would arrest this slowdown in the manufacturing sector. Measures required to boost Manufacturing sector 1. There is a need to give additional focus and attention to the following 2. 3. 4. 5. ‘ 7 employment intensive industries to retain their competitiveness and to ensure that employment level does not come down in the manufacturing sector: (a) Textiles and apparels; (b) Leather and footwear; (c) Food processing; (d) IT hardware and electronics Sectors like textiles and leather, footwear are highly export oriented and are largely affected due to slowdown in demand in the US and other economies. Our apparel exports to US have declined by 4.6% for the period January-August 2008. These sectors need to be given some additional export incentives in the light of the current situation. Government has withdrawn the interest subvention of 4% on export credit given to textiles exporters with effect from 1st October 2008. Also, the Government has reduced the drawback rates for many textile items in view of the fact that rupee is depreciating. However, textiles industry in India is severely hit by rising input cost and declining orders from abroad. These benefits, therefore, need to be restored immediately for the textiles industry The domestic textile firms are concerned about the delay in getting approved funds from the Government under the TUFS (Technology Upgradation Funds Scheme). For the last nine months, textiles industry has not been getting the benefits under the scheme The peak rate of custom duty should not be brought down for the next one year except in case of raw materials that result in value addition in the economy In order to bring down the level of inflation Government had in the last few months imposed export duties and removed the import duties on several Restoring the Growth Momentum and Bringing Back Investor Confidence: FICCI’s Comprehensive Action Agenda’ 6. 7. 8. 9. 10. manufacturing items. Now, that the inflation level is settling down, Government should immediately review the utility of these measures. Government should consider increasing import duty on iron and steel items to 15% from the current 0% (including defectives which is currently at 10%) and re-imposing 14% CVD on import of bars & structures The total incidence of tax on the manufacturing sector needs to be brought down to the levels in the competing countries. Rationalisation of State levies and other duties needs to be done Early introduction of combined GST Corrections to be made in the inverted duty structures wherever prevalent for the manufacturing sector Existing sanctioned project loans should be disbursed expeditiously Reduce Railway Freight Rates by changing classification SME Sector: A Sterling Employer Small and Medium Enterprises (SME) sector in India is the key driver of the nation’s economic growth with a contribution of over 40% to the country’s industrial output and around 35% to direct exports. It accounts for over 90% of the industrial units in the country. In terms of employment, this sector plays a very crucial role being amongst the largest employers in the country. Causes for concern: • • • FICCI surveys show SME sector hit hard by rising interest rates Interest rates for SMEs increased by 3.5% to 5.5% SMEs facing problems with basic infrastructure facilities e.g. unreliable power supply, bad road conditions. This vital sector needs Government support in terms of financial, regulatory, procedural reforms for sustaining its growth in the current economic slowdown. Measures required to boost SME sector 1. The rise in the interest rates is having a direct impact on the operational costs and investment plans of SMEs. To enable SMEs to access sources of capital at lower rates, FICCI suggests that steps should be taken to ensure greater credit flow through cluster-based financing 2. Keeping in view the scattered and decentralized structure of SMEs in the country, similar kind of financial arrangements should be made with the help of cooperative banks, and other local/regional financial institutions. Apart from banks and financial institutions, the existing network of Micro Finance Institutions (MFI) and Non-Banking Financial Companies (NBFCs) could be tapped for provision of loans to these enterprises 3. Government should look at a scheme that offers productivity linked benefits / incentives to SMEs ‘ 8 Restoring the Growth Momentum and Bringing Back Investor Confidence: FICCI’s Comprehensive Action Agenda’ 4. SMEs must be integrated with the large enterprises sector. FICCI feels that the large sector should act as providers of technology, markets, networks, raw materials etc to SMEs that operate as ancillaries, sub-assemblers, and subcontractors. There is significant scope to integrate SMEs with large enterprises and to encourage large enterprises to source from and build the capacity of SMEs 5. Increasing the flow of foreign direct investment into SMEs is another crucial area that needs immediate attention. For increasing the flow of foreign direct investment into SMEs, FICCI suggests that the government looks at a comprehensive strategy like cluster-to-cluster cooperation, export promotion, cluster financing, technology up-gradation, developing infrastructure and logistics chains, technical training and skill up-gradation 6. Economic linkages and technological cooperation between Indian cluster and similar product cluster overseas would be of immense help in the current regime. Since most Indian SMEs are unable to compete in global markets due to their technological deficiencies, international cluster – to – cluster cooperation would help them improve their production techniques and enhance their exports to overseas counterpart cluster Exports : Staring at Declining Fortune Signals are getting stronger that the global financial crisis and looming recession will adversely impact exports from India. Even though exports have registered a healthy 27% growth in August [latest month for which official data are available], with several sectors set for a dismal performance, rise in exports is likely to decelerate to just over 10% in September. What is more, employment-intensive sectors have reportedly witnessed decline: e.g., handicrafts (- 70%), cotton yarn (- 19%), carpets (- 32%), man-made yarn (- 17%), oil meals (- 50%), marine products (- 19%) and tea (- 20%). Importantly, we have to remember that such fall in exports have occurred at a time when there has been a depreciation in Rupee. Causes for concern: • Gems and Jewellery - The situation is more serious since the sector is importintensive and the rising dollar is inflating import bill; also, over a quarter of our gems and jewellery exports typically go to USA (nearly $5 billion out of total $ 19.7 billion). Engineering Goods (around 21% share in India’s total exports, while USA and EU together account for some 40% of total engineering exports). According to a Survey by EEPC, despite the Rupee-depreciation, the orders are not forthcoming. EEPC-members expect decrease in exports by 25% in Rupee terms compared to last year. • ‘ 9 Restoring the Growth Momentum and Bringing Back Investor Confidence: FICCI’s Comprehensive Action Agenda’ o o o Machinery & Instruments (5.6% of India’s total exports and 36% growth in 200708) : over 15% to USA Transport Equipment (4.3% of India’s total exports and 42% growth in 2007-08)) : nearly 10% to USA Manufacture of Metals (4.3% of India’s total exports and 39% growth in 2007-08)) : nearly 24% to USA • • PCFC credit [Pre-shipment Credit in Foreign Currency] for the MSMEs has vanished. EEPC-Members have reported inventories of two months. For overall exports, available indications suggest that this decline is going to be steeper in the months ahead, perhaps November onwards when the impact of recession will be more pronounced. It is important to note that the share of USA in our total exports of goods is around 13% while that of EU is over 21%. Measures required to boost Exports 1. First and foremost, the credit flow should continue with least disturbance. Of late, 2. 3. 4. 5. 6. 7. 8. 9. industry sources are facing some ‘change in attitude’ of banks in disbursing credit to the corporates. Banks and financial institutions should be appropriately advised not to adopt any ‘unduly over-cautious’ approach, so that there is no practical difficulty for firms A related point is to assist the exporters (and business in general) in terms of their “Working Capital” and “Cash Flow” through prompt disbursement of dues on Drawback, CENVAT credit, DEPB claims etc Bring down rate of interest for Pre-shipment Credit in Foreign Currency i.e. PCFC to LIBOR + 1.5 % Evolve a mechanism for refunding State/Local levies and duties Interest rates subvention scheme on export credit should continue at least upto 31 March 2009 Restore “duty drawback rates” for employment–intensive sectors such as textiles/garments, leather & footwear, handicrafts, carpets etc, to the level existing before 1 September 2008 In view of the prevailing “sense of fear and apprehension” among our exporters on possible default by US/European buyers, Export Credit Guarantee Corporation (ECGC) needs to retain and expand its exposure to importers of these countries/regions Refunds from excise department to be made in 7 days instead of current 90 days Credit lines for good credit-worthy exporting companies to be made available since L/Cs and international credit lines are not being accepted Infrastructure Shortfall: Needs to be Met Now Infrastructure is critical for the entire real sector to perform. Initiating large infrastructure projects could act as pump priming in reviving economic activities & growth. The government should look at investing an additional Rs. 100,000 crore per year on building infrastructure in the country. ‘ 10 Restoring the Growth Momentum and Bringing Back Investor Confidence: FICCI’s Comprehensive Action Agenda’ Causes for concern: • • Infrastructure facilities bursting at the seams Infrastructure shortfalls add to manufacturing costs and limits competitiveness Government should leverage the country’s private sector and its resources in a public private partnership framework. The PPP framework has yielded considerable results in the roads and highways and the ports sector. The government should follow a similar approach in all the other infrastructure areas and to give an immediate boost to investments in this sector consider the following. Measures required to boost Infrastructure sector 1. FICCI 2. 3. 4. 5. recommends government should immediately start implementing infrastructure projects under National Highway Development Project, National Maritime Development Programme, etc. which have been financially tied up FICCI strongly recommends the effective utilization of Viability Gap Funding (VGF) scheme for successfully implementation of PPP projects in the country Develop a robust inventory of projects that can be offered to the industry. Completed project dossiers with all approvals granted should be offered to the private sector through the competitive bidding route To overcome the problem of time and cost over-run, the government should initiate long-term integrated plans and promote coordination among different departments and states Accelerate the pace of work on the Delhi-Mumbai Rail freight corridor. Government should also initiate work on private sector participation for modernization of Railways Kick Starting the Housing Sector: Bring Back Consumer Confidence Housing & housing–related activities cover a major part of the construction industry, which is the second largest employer, after agriculture, with about 25 million-construction workers in India. One most remarkable attribute of construction industry is that it has a large multiplier effect in terms of generation of employment & income because it has forward and backward linkages to about 280 associated industries. The promotion of housing not only assists overall economic growth but also helps the poor in a big way through generation of employment. The market size of Indian real estate sector is estimated to be around US $15 billion. Causes for concern: After enjoying almost three years of boom and unprecedented growth, the Indian Real Estate sector has now entered a phase of slowdown. • • • ‘ 11 There is an overall slowdown Correction in property prices and rental values India’s property market hardest hit by high interest rates and gloomy economic prospects Restoring the Growth Momentum and Bringing Back Investor Confidence: FICCI’s Comprehensive Action Agenda’ • • • • Real estate developers squeezed for funds. Financial institutions and banks reluctant to fund real estate developers The home loan rates soared from an average of 7% to as high as 13-14%. Demand for real estate property has decreased nearly 25-30% in India Property prices have already declined 10-20% in certain pockets Private equity players which were a major source of funds too have become far more cautious in evaluating real estate investments in India Measures required to boost Housing and Real Estate sector 1. Housing finance should restart and interest rates and mortgage rates should be 2. 3. 4. 5. 6. 7. 8. reduced to stimulate consumer demand for home loans. Interest rates should be reduced for Retail Home Loan buyers by 200 basis points and for first home buyer by 400 basis points Reinstate the definition of Real Estate business as contained in FEMA. It will be clear from this that Real Estate “does not include development of townships, construction of residential / commercial premises, roads or bridges”. Development and construction should therefore be taken as an integral part of urban infrastructure. This change would encourage banks and financial institutions to resume lending to the industry Announcement of large scale integrated infrastructure and real estate projects to boost investor sentiments Announcement of housing schemes by development authorities such as the latest housing scheme announced by DDA that offered houses at less than market value Encourage public private partnership projects on affordable housing Encourage corporate lending at discounted rates for affordable housing projects Relax foreign direct investment regulations in Real Estate in terms of the project criteria and allow smaller projects to access capital as well, which means that smaller investments could also start coming into the country Allow access to ECBs for construction funds with some restrictions in terms of average maturity ‘ 12 Restoring the Growth Momentum and Bringing Back Investor Confidence: FICCI’s Comprehensive Action Agenda’ Conclusion FICCI’s view is that this agenda must be implemented systematically and completely to prevent the threats to the economy that are real. The focus on growth must be real and undiluted if the economy is to be restarted. The focus on the financial sector is important but not enough. The downstream real sector and their issues for both the large and small/medium AND exporters (whose cause FICCI has been advocating for long) have to be addressed to ensure that there is no damage to the real economy and to ensure that growth for the years of 2009-10, 2010-11 and subsequent years are ensured. ‘ 13 Restoring the Growth Momentum and Bringing Back Investor Confidence: FICCI’s Comprehensive Action Agenda’