In order to the strengthen the confidence in the Indian economy as well as to develop a mechanism to mitigate the risks arising out of the global financial crisis, the apex chamber, Confederation of Indian Industry (CII) has suggested a five-point agenda.
The five-point agenda includes?communication and confidence, domestic liquidity and interest rates, foreign exchange management, credit flow and impetus to growth, fiscal and export promotion imperatives to help real economy.
CII feels that there should be a comprehensive communication exercise by government and regulators in consultation with industry. This could include definitive statements from the government, which assures that there would be no systemic failures allowed. The Reserve Bank of India (RBI) could give guidance on future direction of monetary policy in collaboration with the government. The government may consider a guarantee for all bank deposits for a period of two years to maintain depositor confidence in the banking system.
There should be a further reduction in repo-rate by at least 150 bps and in cash reserve ratio (CRR) by 250 bps to regulatory floor level of 3% to ensure adequate liquidity and reasonable cost of funding.
RBI could also consider further reduction in statutory liquidity ratio (SLR) by 2% and allowing oil and fertilizer bonds acceptable for SLR. The reverse repo rate also could be cut by 50 bps, since the RBI has started borrowing from some banks. Apart from this, there should also be a provision of special line of liquidity directly form the RBI to mutual fund and non-banking financial companies (NBFC) sectors, to enable orderly operation of financial markets.
According to CII, India needs to open up to attract greater foreign exchange inflows by easing of foreign direct investment (FDI) norms. In this context increasing the limit of foreign holding in insurance companies from 26% to 49%, as proposed in the draft Insurance Bill becomes very important. The government could also take this opportunity to consider norms for FDI participation in other sectors.
In addition the government needs to consider floating another large bond scheme like the ?Resurgent India Bonds? or the ?India Millennium Bonds?, which have been a success earlier. It is quite possible to attract about $5 billion through this route. CII is of the view that there is need to shield the most vulnerable in the industry ? the small and medium enterprises sector (SME) sector. Therefore, it is the recommendation of CII that a corpus be set up for lending to SMEs, as they are disproportionately hurt by the non-availability of credit. RBI could immediately look to reduce the risk weight for lending to SMEs. Simultaneously, the finance ministry and RBI could set up a special purpose vehicle (SPV). This SPV would have to ensure that SMEs are allowed credit at close to prime lending rates (PLR) depending on the creditworthiness of the unit and the project.
With global demand drying up fast, many exporting countries are looking at India to push their products at very low prices, in order to clear inventory and protect their domestic industry from facing prospects of closing down. This is a time when a greater degree of vigilance and speed would be required from the Anti-Dumping Directorate of India. An immediate strengthening of the Directorate would be necessary in this regard.