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Monday, 6 August 2012

Chidambaram calms investors, to review retrospective tax: Top 10

Finance minister P Chidambaram has sent out signals that could bring cheer to investors and the stock market. Chidambaram has ordered a review of all retrospective tax policy and promised fiscal consolidation. He said that the government would work in tandem with Reserve Bank of India to bring down interest rates to stimulate growth.

Here are ten things to note:

1)      Retrospective tax: Finance minister P Chidambaram has directed a review of tax provisions that have a retrospective effect in order to find fair and reasonable solutions to pending as well as likely disputes between the tax department and the assesse. "We will take corrective measures wherever necessary," Chidambaram said. The announcement of a possible imposition of general anti-avoidance rules or GAAR by the Indian government put off investors. India has witnessed a consistent decline in the foreign investment since the announcement of the budget in March 2012. The implementation was postponed to April 2014. 

2)      High interest rates: He said that high interest rates are a burden on the consumer and that the government would take appropriate steps. RBI left key rates untouched in its monetary policy review on 31 July 2012. This was due to the inflation rate staying high.

3)      Fiscal consolidation: To bring down interest rates, government needs to control the fiscal deficit. This is equal to the amount of money government borrows from RBI. The government has set up a committee to assist the government in formulating the path of fiscal consolidation. He expects the work to be completed in few weeks. Chidambaram said that adjustments have to be made both on expenditure and revenue side.

4)      Inflation: Chidambaram said that the government would take steps to remove constraints on the supply side. He said that food grain stocks would be used to moderate prices and the government would enhance import of items in short supply. He expressed confidence about moderation in inflation in the medium term. “The government and RBI to ensure that the inflation is moderated in the medium term,” he said. 

5)      Investment: In the next few weeks the government should announce a number of schemes to encourage investments in the mutual funds and insurance sectors. Chidambaram said that an investment tracking system for proposals worth Rs 1,000 cr and above has been approved by the PM. “It is our intention to raise the investment level to 38 per cent of GDP as was in FY’07-’08,” Chidambaram said. It fell to 33 per cent for 2011-12. 

6)      Currency volatility:  Chidambaram said that volatility of exchange rates has reduced in recent weeks and an assurance on investment climate would bring stability to the exchange rate. “We will fine tune policies and procedures to facilitate capital flows into India,” he said.  Over the past one year, the Indian rupee has slumped 25 per cent.

7)      Slowdown in manufacturing: The finance minister said that it was imperative to reverse low growth in manufacturing and exports. “We will implement appropriate short and medium term measures for manufacturers and exporters,” he said. Sectors like petroleum, textile and power are under stress and the cabinet committee on economic affairs would take significant decisions to push these sectors, he said. India’s manufacturing growth in July 2012 was down to its weakest pace since last November, a business survey showed on Wednesday. The HSBC manufacturing Purchasing Managers' Index (PMI), which gauges business activity at India's factories but not utilities, fell to 52.9 in July, from 55.0 in June - its biggest one-month drop since September last year.

8)      Drought situation: To deal with the drought situation, the government will merge Mahatma Gandhi National Rural Employment Guarantee or MGNREGA and other schemes. India's monsoon rains in June to September are likely to be 85 per cent of the long-period average, the weather office chief said.

9)      Doing business in India: The government is looking to remove any apprehension or distrust among investors. “Must remove perceived difficulties in “doing business in India,” he said. Foreign investors are concerned about slow pace of reforms. The government is seeking a political consensus on key pending reforms like FDI in multi-brand retail.

10)   Growth: We are challenged by the global economy, natural calamity and by our record on fiscal consolidation. “A moderate growth in two out of the 8 years should not discourage us,” Chidambaram said.


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