P Chidambaram, Raghuram Rajan order banks to cut interest rates on loans

FM P Chidambaram and RBI Governor Raghuram Rajan have laid the foundation for a grand Diwali dhamaka that is likely to lead to banks cutting interest rates on loans for the festive season. Government today decided to enhance capital infusion into the PSU banks over and above what was provided in the Budget to enable them to extend more credit to auto and consumer durables sectors to stimulate demand and combat slowdown.

At a meeting between Finance Minister P Chidambaram, RBI GovernorRaghuram Rajan and Economic Affairs Secretary Arvind Mayaram a decision was taken to increase the quantum of capital infusion into PSU banks.

Related: RBI bans zero per cent interest rate scheme for buying goods

"This amount (Rs 14,000 crore provided for capital infusion in Budget) will be enhanced sufficiently. The additional amount of capital will be provided to banks to enable them to lend to borrowers in selected sectors such as two-wheeler, consumer durables, etc at lower interest rates in order to stimulate demand," a finance ministry statement said.

It further said the additional fund infusion would help in combating slowdown and boost output.

Related: The story behind zero per cent interest EMI schemes

"While this will bring relief to consumers, especially the middle class, it is also expected to give a boost to capacity addition, employment and production," it added.

As per the latest industrial output data, the output of the consumer durables sector declined by 9.3 per cent in July, from a growth of 0.8 per cent in the same month last year. The segment saw a 12 per cent decline in output in April-July compared with growth of 6.1 per cent.

Consumer durables, a reflection of demand for manufactured products, include TV, fridge, washing machine.

The two-wheeler sales recorded a flat growth of 0.72 per cent in April-August period current fiscal, as against a growth of 6.8 per cent in the corresponding period last year.

The meeting, which lasted for over an hour, discussed credit growth in different sectors.

The quantum of additional capital infusion, however, was not disclosed by the government.

The Economic Express

Q1 GDP grows slower than expected at 4.4%

India's Gross Domestic Product (GDP) grew at a slower than expected rate of 4.4% for the first quarter of the current financial year. This is below an ET Now Poll estimate of 4.6%. The economy grew at the slowest quarterly rate since the global financial crisis. The growth was contracted by a contraction in mining and manufacturing. 

The agricultural sector of the economy grew at 2.7% versus 1.7% QoQ. Manufacturing sector growth contracted at (-)1.2%. While the trade and hotels growth cae in at 3.9% versus 6.2% QoQ, the construction sector grew at 2.8% versus 4.4% QoQ. 

Electricity & gas sector grew at 3.7% versus 2.8% QoQ. Mining sector growth contracted at (-)2.8% versus (-)3.1 QoQ. 

The Indian economy has been steadily losing momentum in recent years. Economic growth virtually halved in two years to 5 percent in the fiscal year that ended in March -- the lowest level in a decade -- and most economists surveyed by Reuters in the past week expect 2013/14 to be worse. 

The industrial sector contracted in the first quarter, the 1.1% fall in the index of industrial production showed. The decline in the purchasing managers' index for services in the first quarter indicates a widening of the slowdown to services sector that expanded 6.5% last year. The HSBC Markit Services Purchasing Managers' Index fell to fell to 47.9 in July from 51.7 in the previous month, falling below the 50 mark that shows contraction. 

Worryingly, apart from the good monsoon that can boost the rural economy, there is not to look ahead either. Even the effect of good monsoon will show up only from the second quarter. The severe liquidity squeeze unleashed by the RBI is unlikely to be a quick relief pill as initially believed, and may soon be replaced with a wider monetary tightening. 

The rise in inflation to above 5% has further cramped RBI. "The situation calls for monetary tightening. The interest rate differential is needed to attract investment," said Devendra Pant, chief economist, India Ratings. 

Higher interest rates will dampen demand and delay investments revival, and more importantly, the central bank will be out of the equation as far as stimulating growth is concerned. 

Higher subsidies may force further reduction in spending, if P Chidambaram stays with his budgeted fiscal deficit target of 4.8% of GDP. The authorities were counting on the higher government spending to keep the economy afloat while the policy makers tried to get stalled investments moving through the cabinet committee on investments. 

Emphasising the need for Parliament to run smoothly for boosting investors' confidence,Prime Minister Manmohan Singh on Friday said, "Its incorrect to say investors have lost confidence; Parliament is the supreme body, it is not being allowed to function." 

Stating that the opposition needs to recognise its responsibility, Singh said that essential legislations need to be passed for future of the country. "Consensus building is the responsibility of government and opposition. It is the responsibility of the members of this house to send out a message," he reiterated. 

"I do recognize there is a problem, it can be solved only if opposition recognizes its role, conduct in Parliament," he said in a reply to Arun Jaitley. 

"We have a responsibility to act collectively to deal with this crisis on confidence," he said. "We need to make sure India perceived as creditworthy, bankable & viable," he added. 

Earlier in the day the PM ruled out reversal of reforms or resorting to capital controls to rescue the sliding rupee, which he said fell on account of domestic as well as global factors. 

Making a statement on the state of theeconomy in Parliament amid concerns over rapid depreciation of rupee, Singh said the country has to be ready for short-term shocks but the government will ensure that the fundamentals of economy remain strong. 

"We are faced with challenges but we have the capacity to deal with them,", he said, while seeking support of all political parties in this situation. 

Breaking his silence on the decline of rupee, he said there "may be short term shocks to our economy and we need to face them. That is the reality of the globalised economy, whose benefits we have reaped". 

There is no question of reversing the policies just because there is some turbulence in capital and currency markets, he said, adding the "sudden decline in exchange rate is certainly a shock, but we will address this through other measures, not through capital controls or by reversing reforms".

source:Economic Times

The Food Security Bill takes us back to the 1970s as lessons of history are ignored

The most powerful politician in the country wants economic growth to be more inclusive and turns increasingly leftward. Her finance minister is worried. There is conflict in the Middle East, with Egypt and Syria at the heart of it. Industrial output is stagnant and the balance of payments situation is worrisome. The government, however, sends contradictory signals. There is nationalisation of wheat trading even as the government introduces direct tax reform legislation and follows it with a big cut in tax rates.

Were we talking about Sonia Gandhi and P Chidambaram? No, we were referring to Indira Gandhi and her finance minister YBChavanin 1973-74, when rhetoric and some decisions were socialist, while grim economic reality pushed the government to slowly unshackle the economy. The passage of Sonia's cherished Food Security Bill in theLokSabha is reminiscent of the early 1970s, when the simultaneous left-right lurch ended with the economy contracting by the end of the decade and subsequent help from the IMF. 

The food bill is a bad idea and does no service to the poor. It fails the country on two critical counts, on economic implications and winning the war against malnutrition. Food security has received enormous budgetary support over the last decade. The price at which the central government gives grain to the poor has remained unchanged for 13 years, even as the economy has grown fivefold along with an increase in average household consumption expenditure during the time. The question today is whether this bill is the need of the hour. No, as this bill makes it almost impossible to bring about any meaningful reform in the overall package of subsidies. All this for cereals, an item of household consumption spending that has been falling. The bill also reduces space a future government will have to reorient spending. 

Recent research has increasingly begun to point to India's sanitation record as an important factor in explaining child stunting. High population density coupled with open defecation by half the country has resulted in a disease environment that leaves India with a child stunting level greater than sub-Saharan Africa, even if infant mortality rates are lower. Sanitation battles, however, cannot be won by grandstanding. India's misfortune today is that her politicians refuse to heed lessons of history.

Source:Times of India

India cannot afford to grow at less than 8%: P Chidambaram, FM

     
          Blaming the political logjam in the Parliament for stalling economic decisions, Finance Minister P Chidambaram on Tuesday said that India cannot afford to grow at less than 8%. "There is no political consensus on how to mitigate economic woes," he said.

Chidambaram said that there are no signs of global crisis ending and the Indian economy is challenged by global factors. "India needs more reforms and less economic restrictions," he said while addressing the Lok Sabha. "India needs a more open economy to seed growth," he added.

"The polity needs to agree on a basic direction of policy making," he emphasised. "Political parties should agree on a common economic programme," he said.

Seeking to assure the house, Chidambaram said that the economy has sufficient reserves and the external debt is manageble. He, however admitted the need to shore up the reserves. :We will fully and safely finance FY14 CAD, it will contained at $70 billion or less," he added.

Chidambaram's comments come after BJP leader Yashwant Sinha said, "Rupee is tanking but government, Chidambaram keep saying All Izzz Well."

Earlier in the day, Sinha said that the government sowed the seeds for the current crisis, back in 2008-09. "In a move that was aimed to win elections, the government hiked consumption expenditure, as opposed to the recommended investment expenditure," Sinha hit out.

Sinha explained that a high fiscal deficit leads to higher inflation, which in turn impacts investments. When the fiscal deficit continues to be high, it is natural for it to spill into current account deficit, he added.

Stating that the rupee has fallen despite Reserve Bank of India's (RBI) efforts, Sinha said that it is the responsibility of the government and central bank to curb the volatility in the currency. "Such rapid volatility does not bode well for the economy," he said. "Foreign investors shying away from India's growth story," he added.

source: http://economictimes.indiatimes.com/news/economy/indicators/India-cannot-afford-to-grow-at-less-than-8-P-Chidambaram-FM/articleshow/22097263.cms

Rupee may gain this week on FM P Chidambaram's pep-talk

The rupee, which rebounded by a massive 135 paise last Friday, may continue to gain this week as investors hope government and Reserve Bank will make more efforts to stabilise the market, say treasury heads of banks. 

The domestic currency, which touched an intra-day low of 65.56 on August 22 on fear that the US Fed was on course to taper off its monthly asset purchase programme, recovered sharply on August 23 to end at 63.20 after the pep-talk by the finance minister on CAD and fiscal deficit. So far this fiscal, rupee has lost close to 20 per cent. 

"The rupee should continue with the Friday's trend of appreciation this week also. Investors hope the government and RBI are committed toward curbing volatility in the forex market," said Srinivasa Raghavan, treasurer at Dhanlaxmi Bank. 

Finance Minister P Chidambaram and senior ministry officials met top bankers and overseas investors over the weekend here and discussed fund-raising plans apart from allaying the fears of FIIs over capital control. 

After the meeting, Financial Services secretary Rajiv Takru told reporters that the measures to attract fund flows would be announced within a week or so. 

Economic Affairs Secretary Arvind Mayaram, who also accompanied Chidambaram, said, "There is no need to get excessively worried about funding CAD given the robust FDI inflows, which grew 70 per cent in Q1 year-on-year to USD 9 billion. 

"So, we think investment will begin to pick up and therefore one needs to continue to watch and see how we can get stability back on the rupee front." 

He also said outflows would be more than compensated by strong inflows. 

Last week, Chidambaram had said the rupee was undervalued and has overshot appropriate levels. He also asserted there is no need for excessive and unwarranted pessimism. 

Mayaram told reporters here that government was taking many structural reforms to finance the current account deficit and boost investors sentiment. 

"These reforms will begin to show results in the current year itself and we are hopeful that this will have a reflection on the growth that happens in the next three quarters," Mayaram told reporters. 

Outgoing RBI governor D Subbarao had said on Thursday that the forex reserves were enough to manage current situation of declining rupee, and RBI would take more measures to curb rupee volatility as and when necessary. 

However, some market participants expect the rupee to be range-bound and trade in the 62.50-64.50 level this week. "Fed concerns are here to stay. We may see RBI coming in on the rupee fall, but their presence may not be that strong as it was last week," said Agam Gupta, managing director and head of fixed income trading at Standard Chartered Bank. 

"Also, any fall to 64.50 will see exporters selling dollars," Gupta added. 

Dealers also expect that month-demand from oil importers may also weigh on rupee this week.



Will Rupee gain this week...


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