Economy in India grew at 5.3% in the March quarter, the slowest in nine years, as companies held back investment, partly on worries over uncertain policymaking, including tax proposals that could be implemented retroactively. Finance Minister P. Chidambaram says he has a definite plan to beat inflation, boost economy and attract foreign investment to India. P. Chidambaram who became Finance Minister on July 31, suggested he wanted interest rates to be lower, prompting bond yields to pull back. Bond yields in India fell 5 basis points after his comments on interest rates. Chidambaram, who was previously India’s home minister, returns to a finance ministry post he has held twice before, and investors hope he is able to revive the prospects. In his first address as the Finance Minister of India, Chidambaram promises a review of retrospective tax provisions to solve pending tax disputes and push for faster clearances to attract investments to India. He sought to soothe worried investors by saying he would bring clarity to tax laws and unveil a plan to rein in India’s fiscal deficit.
Chidambaram said the Government of India hopes to bring investment back up to 38% of GDP, its level in the fiscal year that ended in March 2008. It was 32% of GDP in the year that ended in March 2012. India’s budget deficit for the fiscal year that ended in March was 5.76% of GDP & for the April-June period, the deficit rose to 1.9 trillion rupees (INR), or 37.1% of the full fiscal year 2012/13 target. He also warned that there is a drought-like situation in many states in India. Though price stability is an important objective, food inflation is still high and the government will take steps to remove supply-side constraints. Saying that fiscal, monetary policies must move in tandem, Chidambaram is confident inflation can be tamed in the medium-term. He implored that states should share fiscal burden & also stressed that assessment should be made on spending and revenue.
Though the RBI – Reserve Bank of India, since January 2012, has cut repo rate by 50 bps and CRR by 125 bps, and a 100 bps SLR cut last week, the effect of the same has not been passed on to the customers by banks by lowering interest rates as a whole. Deputy governor Anand Sinha today said the RBI – Reserve Bank of India would like the banks to cut the minimum lending rate to better carry forward its monetary policy measures. He said banks are unable to cut their base rates as per the monetary policy changes, because they carry the burden of fixed rate deposits and fixed costs to service that over a longer-time. A handful few banks like the SBI – State Bank of India and the Union Bank of India , among a few others, have slashed interest rate on certain select loan products like home loans and lending to SMEs, but have not yet cut the base rate, or the minimum rate of lending.
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