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Chidambaram Pledges Indian Fiscal Plan in Bid to Lure Investment

August 06, 2012

Indian Home Minister Palaniappan Chidambaram

Palaniappan Chidambaram, India's Home minister. Photographer: Graham Crouch/Bloomberg

Indian Finance Minister Palaniappan Chidambaram said he will unveil steps for fiscal consolidation and clarify tax laws, as he seeks to revive investment in an economy growing at the weakest pace in almost a decade.

“The economy is challenged by a number of factors,” Chidambaram said in his first statement in New Delhi yesterday since his appointment last week. “Uppermost in my mind is the duty to regain the confidence of all stakeholders. We intend to unveil, shortly, a path of fiscal consolidation.”

Chidambaram faces the task of rejuvenating the economy as elevated inflation saps growth and political gridlock deters investment, with a weak monsoon and a slump in the rupee further dimming the outlook. Policies will be “fine-tuned” to assist capital inflows, he said, adding “corrective measures” will be taken on tax laws where necessary.

“These are all positive statements and hint at several measures which he is likely to take,” said Anubhuti Sahay, an economist at Standard Chartered Plc in Mumbai. “Market sentiment would, however, depend on the actual actions which follow these statements.”

Chidambaram said he has ordered a review of provisions allowing the retrospective taxation of overseas deals in which an Indian asset is transferred. That measure, and a planned clampdown on tax avoidance due next year, have stoked concern that the climate for investors is deteriorating.

Rupee, Stocks

The rupee rose 0.4 percent to 55.5225 per dollar at the 5 p.m. close in Mumbai yesterday. The BSE India Sensitive Index (SENSEX) of stocks climbed 1.3 percent, while the yield on the 8.15 percent bond due June 2022 declined to 8.22 percent from 8.26 percent last week. The currency has plunged about 19 percent in the past year as growth slowed and Europe’s debt crisis damped demand for emerging-market assets.

A panel has been established to help the government in “formulating the path of fiscal consolidation” and is expected to complete its work in a few weeks, he said. The government’s goal is to boost investment back to the level of 38 percent of gross domestic product, he added.

Indian GDP increased 5.3 percent in the first quarter from a year earlier, the least since 2003. Inflation, stoked by food costs, has exceeded 7 percent for most of 2012, the fastest pace among the world’s biggest emerging markets.

The nation also projects record borrowing of 5.69 trillion rupees ($102 billion) to plug a targeted budget shortfall of 5.1 percent of GDP in the year that began April 1.

Working With RBI

Chidambaram said fiscal and monetary policies must “move in tandem” and that the government will work with the Reserve Bank of India to curb inflation, including tackling supply-side constraints and using stocks of grain to contain food prices.

The Reserve Bank left interest rates unchanged at 8 percent on July 31 for a second meeting, citing inflation risks including the weaker rupee, the impact of below-average rains on crops and the possible increase of subsidized fuel prices.

“We are conscious that current interest rates are high,” the finance minister said yesterday. “Sometimes it is necessary to take carefully calibrated risks in order to stimulate investment and to ease the burden on consumers. We will take appropriate steps in this regard.”

Standard & Poor’s and Fitch Ratings have cited risks such as the fiscal deficit in warning they may strip Asia’s third- largest economy of its investment-grade credit rating.

Moody’s Investors Service has said power blackouts last week, India’s worst, underscore infrastructure gaps and have a “credit negative effect” on economic activity.

“The key to restart the growth engine is to attract more investment, both from domestic investors and foreign investors,” Chidambaram said, adding “we must remove any apprehension or distrust” they may have.

He said decisions will be announced in the next few weeks to boost investment through mutual funds and insurance policies.

Chidambaram, 66, became finance minister for the third time on July 31. Prime Minister Manmohan Singh is trying to end legislative gridlock that has undermined his development agenda.

To contact the reporters on this story: Bibhudatta Pradhan in New Delhi at bpradhan@bloomberg.net; Rakteem Katakey in New Delhi at rkatakey@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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