Hike in CRR By RBI Expected to Slowdown Nascent Industrial Recovery: PHD Chamber

Shri Ashok Kajaria, President, PHD Chamber has expressed concern that the hike in cash reserve ratio by a total of 75 basis points from 5.0 per cent to 5.75 per cent, 50 bps with effect from February 13, 2010, and 25 bps with effect from February 27, 2010 may adversely impact availability of funds with the banks for extending credit to the industry as the third quarter monetary policy move will drain out Rs 36,000 crore of liquidity from the banking system. He has expressed concern that the increase in non-food bank credit to the commercial sector at 14.4 per cent as on January 15, 2010 is significantly lower than the 22.0 per cent growth a year ago.

President, PHD Chamber has expressed that although the Indian economy has exhibited impressive resilience with a GDP growth of 7.9 per cent in the second quarter (October- December 2009) yet the impact of deficient monsoon, escalating food prices, burgeoning fiscal deficit, massive influx of foreign funds in the stock market and above all the uncertain global environment could well find a reflection over the rest of the year.

The Index of Industrial Production (IIP), which measures industrial activity, grew by 11% in November 2009 backed by expansionary fiscal policies by the Government, several policy initiatives taken by the Reserve Bank to ease liquidity, stimulate demand and moderate the impact of the global downturn and credit crunch on the economy during 2008-09. Stressing the fragility of global recovery in January 2010, the International Monetary Fund has already emphasized on the need to continue stimulus packages. IMF has warned that growth around the world was still largely driven by government stimulus measures and countries risked a return to recession if anti-crisis measures are withdrawn too soon.

The main reason for high food inflation in the country is the imbalance in the growth in domestic production and consumption and may not be tackled effectively through monetary tightening through increase of interest rates by RBI. It is extremely important for the government to take measures to augment the supply of essential commodities at the earliest. Central banks across countries have continued with an easy monetary policy stance in Q1 2009, which has continued in Q2 2009. Premature exit could dampen the growth prospects and delay economic revival and may lead to slackening of growth momentum. President, PHD Chamber suggests that there is need to rekindle business sentiment by contemplating bold demand inducing measures. 

President, PHD Chamber has expressed hope that the Reserve Bank of India will take measures to accommodate the financial needs of the industry till the economy is back on its growth path and hold the interest rates at current levels in the annual Monetary Policy to be announced in April.

India continues to face large gaps in the demand and supply of essential social and economic infrastructure and services. The Eleventh Five Year Plan (2007-12) has estimated an investment requirement of US$ 500 billion in infrastructure for broad-based and inclusive growth. The greatest challenge facing our country is to build an effective, efficient, scalable and sustainable infrastructure. Considerable increase in infrastructure investment will have to come from the private sector. Hence, access to finance at cost effective rates is extremely essential in empowering the economy and helping industry to gain traction.

Priority should be given to accelerating the modernization of the financial sector.  India must continue with banking reforms and initiate major insurance and pension reforms.  As a modern economy, India should not shy away from foreign investment in this sector and make it easier for private and foreign banks to operate.

The Quick results of 4th All India Census of MSMEs (2006-07) reveal that sickness in MSMEs has increased from 13.98% in 2001-02 to 14.47% in 2006-07. One of the reasons for sickness is shortage of working capital. PHD Chamber suggests that it is essential to ensure financial inclusion of MSMEs. It is suggested that credit should be provided to the MSME sector at least at PLR so that the small scale sector may not have to experience difficulty in availing credit at affordable cost from the banking sector. There is also a need to devise strategy for cost effective finance to the micro sector.

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