FICCI's Business Confidence Survey over the last three quarters has shown a decline in industry's confidence level as inflation creeps up and the fiscal situation not being in the pink of health, given the massive food, fuel and fertiliser subsidies. The interest rates in the economy have increased significantly and industrial growth has lost steam over time.

The graphs below show the decline in business confidence (Figure 1), slowdown in industrial growth particularly in manufacturing and simultaneous rise in inflation (Figure 2).

Figure 1

Figure 2

Inputs gathered by FICCI from industry show that the fall in business confidence and the loss of momentum of industrial growth are largely due to tight monetary policy followed by the RBI. Over the last two years, the central bank has raised the repo rate and increased CRR successively to rein in the inflationary pressures in the economy.
 
However, FICCI's research shows that inflation in India has proved to be insensitive to interest rates (Figure 3 and Annex 1). In other words, interest rates, as a tool to manage inflationary pressures is not yet producing results. On the contrary and as already mentioned, the rising interest rates have taken a toll on the growth process and have considerably slowed down the Indian industry and impaired investor confidence.

Figure 3

FICCI studies show that current inflationary trends are being caused by serious supply side issues of capacity. These supply issues can only be addressed by rapidly creating more capacity on a war footing. In a sense, therefore, to sustainably address this inflationary problem requires an economic policy that ensures rapid investment flows into building out additional capacities. Thus, investment formation should remain at the core of the economic strategy when it comes to inflation. The current monetary policy efforts aimed at controlling inflation are having the exact opposite effect with capacity expansion being deferred and have the real risk of causing stagflation.

FICCI proposes the following 100-day agenda for the government. As a prescription to bring back confidence in the economy, FICCI recommends the following:

1. Urgently stimulate investment across the economy
2. Enhance efficiency and competitiveness of our economy by targeting reduction in transaction costs
3. Set new standards in governance
4. Address the perception of a looming fiscal crisis

1. Urgently stimulate investment across the economy – The expansion of the Indian economy over the last four years has been on the back of increasing investment flows and rising investment to GDP ratio. Therefore, it is important for the government to sustain and stimulate such investments in critical sectors so that growth is maintained.

• Investment formation in agriculture – Agriculture contributes 20 per cent to the national income and provides employment to 60 per cent of the population. FICCI believes that the entire agriculture economy, given the focus of the government, can be transformed from a largesse driven sector to an internationally competitive sector where Indian farmer and agri business can become the food suppliers to the consumer of the world. The government policy should trigger a second green revolution and for this the industry body suggests:
  • Priority sector lending norms for banks should be appropriately changed to include investments made by corporates in agri market infrastructure such as construction of warehouses, cold chain transportation etc. in the direct finance category of priority lending.
  • Private sector investment in agri infrastructure should be eligible for 150 per cent weighted deduction as is the case with investment in R&D. The same benefit should also be extended for investments made in agri R&D and extension services provided to the farmer.
  • Recommendations of Dr. Mashelkar and Dr. Swaminathan committees on restructuring the ICAR system should be implemented.
  • Amending the Agriculture Produce Marketing Committee Acts at the state level so as to allow setting up of private mandis, direct procurement from farmers and contract farming is important to impart vibrancy to the agriculture sector and attract the much needed investments. Central government must therefore set up an empowered committee to resolve the pending issues with regard to APMC amendments at the state level as also to bring uniformity in laws across states. The committee must also follow up on the implementation of the changed laws in full letter and spirit at the ground level.
    
• Investment formation in financial sector – Liberalization of Indian markets in insurance, pensions and fund management would lead to the development of new sources of capital and deepen India's domestic capital markets. For achieving this goal, the government may consider the following:
  • Government should take up the Insurance Laws Amendment Bill including hiking of cap on foreign stake in insurance firms to 49 per cent from the current 26 per cent. The government must take up this issue as insurance is a capitalintensive business and foreign investors can be an important source of capital for the domestic players in this business.
  • The Pension Fund Regulatory and Development Authority Bill is pending in Parliament despite the approval of the standing committee on finance, which the government should take up at the earliest.
  • The Banking Regulation Bill should also be taken up by the government, as there is a need to align voting rights with shareholding to attract fresh investments into the sector. Further, there is a need to rationalise government shareholding in banks. This has been a long pending issue and is constraining the capacity of banks to raise capital to provide more credit for growth.
    
• Investment formation in telecom – In order to push investment formation in this sector, the government should expedite the announcement of a world-class 3G policy and auction guidelines, allowing for an open, global and transparent auction process consistent with international best practices. This would help build a greenfield pan India state of the art communication infrastructure in the country and bring in fresh investments to the tune of $8 to $10 billion over the next two to three years.
  
• Investment formation in other sectors
  • Infrastructure - The overstretched infrastructure facilities in our country substantially adds to our manufacturing costs and limits our competitiveness. To address the infrastructure deficit in the country, it is important that the government leverage the country's private sector and its resources in a public private partnership framework. The experience with ultra mega power projects has shown that public-private partnerships, if backed by a will to provide an equal opportunity to private developers in a transparent and conducive environment, can lead to implementation of projects of any scale and at very competitive prices. The government should follow a similar approach in all the other infrastructure areas and to give an immediate boost to investments in this sector consider the following:
    
  •  Develop a robust inventory of projects that can be offered to the industry. Completed project dossiers with all approvals granted should be offered to the private sector through the competitive bidding route. 
    
  • To overcome the problem of time and cost over-run, the government should initiate long-term integrated plans and promote coordination among different departments and states.
     
  • Accelerate the pace of work on the Delhi-Mumbai Rail freight corridor. Government should also initiate work on private sector participation for modernisation of Railways.
    
  • Special economic zones - In the case of the special economic zones, there has been a lot of back and forth movement. FICCI suggests that the policy framework for SEZs should be stabilised. The ceiling of 5000 hectares on multi-product SEZs needs to be reviewed and done away with.
  • Energy - Finalise a comprehensive demand moderation strategy based on market forces and incentive / disincentive structure. Such a move would not only help economize energy consumption but also improve the economics of the sector and thereby promote greater investments.
  • Retail - Retail is a fast-growing sector with significant capacity for employment generation. Granting 'Industry' status to this sector and allowing FDI in multi-brand retail will lead to a quantum jump in investments into this sector.
  • Education – To attract private investment into higher education allow companies under section 25 to set up higher educational institutions to plough back surpluses for development and expansion.
  • Defense - Open up the defense and homeland security industry to the private sector to leverage the capabilities of industry for achieving the long-term goal of indigenisation of India's defense imports. Towards this end, the government should implement the RURs and broaden the RUR norms to enhance scope for private sector participation in this important sector.
    
• Reform labour laws
  
  • Make labour a state subject and let the state governments decide on the changes that need to be introduced in the labour regulations keeping in mind the requirements of the local industry.
    
•   Finance, taxation and banking
  • Calibrate the interest rate policy by giving due attention to the investment needs of the economy and industry.
  • Expedite the introduction of the proposed Income Tax code.
  • The recommendations of the J J Irani committee on company law should be incorporated in the proposed new company law bill and the same should be introduced in the parliament at the earliest.
  • Work on the Limited Liability Partnership (LLP) Bill should be expedited and tabled in Parliament.
  • Government should relax the guidelines with regard to raising ECBs and their end use. Greater flow of funds from abroad into the Indian market would not only support investment activity, but also stem the depreciation of the Rupee and help in managing the 'imported inflation' that we face given the rising price of crude oil in the international market.
  • For addressing the long-term financing needs of the industry, the government must give a strong impetus to develop and deepen the debt markets in India. Deep and vibrant debt markets can play a vital role in infrastructure financing that needs long term funds. With the role of DFIs in the economy waning, it is important that insurance companies and pension funds along with banks and specialized financial institutions are encouraged to participate in the long term debt market.

2. Enhance efficiency and competitiveness of our economy by targeting reduction in transaction costs

• Create a seamless national market for industry, removing the barriers in inter-state movement of goods will considerably bring down the time and costs incurred by industry and improve transactional efficiency.
• Government must push for streamlining the process of granting environment clearance for industrial projects. Introduce the concept of 'deemed approved' after 90 days.
• Arrive at a consensus to rationalise compliance norms for manufacturing industry to minimise inspector raj.

3. Set new standards in governance

• Improve efficiency in public spending. Lack of reforms in public institutions, absence of user feedback mechanisms, difficulties in monitoring the delivery mechanisms make it difficult, especially for the weaker sections of the society, to access the various schemes and services provided by the government.
  • There is scope for bringing about considerable improvement in the quality of public spending. Government must consider partnering with civil society institutions to evaluate and improve the outcomes of various publicly funded social and economic schemes.
  • FICCI has offered to partner the government in monitoring and evaluating select central government plan schemes such as National Child Labour Project, Welfare of SC / ST job seekers through coaching, guidance and vocational training, Scheme for infrastructure development in food processing industries, MSME cluster development programmes and MSME growth poles etc.
• The government must take a fresh look at disinvestment of 10 per cent to 15 per cent through the market route and initiate disinvestment of public sector units. This process would help the government partially meet the expenditure that has been committed for the social sectors as well as for the farm loan waiver scheme announced in the last budget.
• Fill up all vacancies at regulatory organisations 
• Ensure better targeting of subsidies - Today there is no clarity and consensus on target groups for various subsidies. The government must develop a mechanism for identifying and targeting beneficiaries for these subsidies.

4. Address the perception of a looming fiscal crisis