Posted by Gilmour Poincaree on November 28, 2008

27 Nov 2008, 0425 hrs IST, ET Bureau

Before the financial crisis broke out, it was generally believed that corporates were in the pink of HARI SHANKAR SINGHANIAfinancial health. As the credit and liquidity crunch has intensified, the vulnerabilities have come tumbling out. Hari Shankar Singhania, President, JK Organisation, discusses with ET the financial crisis and its implication.

Much of India’s current economic problems relate to the external sector — exports, rupee depreciation and capital inflows. Should it cause a panic ?

To a great extent the current economic turmoil is a fall-out of global economic crisis, which in turn is the outcome of US subprime crisis. However, what had began as financial crisis is now a crisis in the real economy affecting growth outlook of all major economies of the world and India is no exception.

Contrary to what was believed earlier, Indian economy is not immune from developments in the global economies. There is no panic but there is no denying that lot of uncertainties have been created with HARI SHANKAR SINGHANIAsharp reduction in GDP and industrial growth rates, steep and continuing fall in stock prices, erosion of export growth and depreciation of rupee. All these are creating crisis of confidence.

Before the crisis, the general impression was that corporate balance sheets were very strong. What has gone wrong ?

You are right when you say corporate balance sheets were generally strong. I will say that the crisis has not eroded the intrinsic strength of the Indian corporates and we have to distinguish between the intrinsic strength of a company and its balance sheet.

The latter primarily reflects the arithmetic of corporate results, which, in turn, is influenced by the business scenario. The former is a reflection of competitiveness, and entrepreneurial acumen which we have. What has gone wrong is that as the current economic environment is impacting the revenue side of the balance sheet, the expenditure side continues to be impacted by several exogenous factors that are beyond the control of the companies, i.e., high interest cost, rising cost of raw materials, Inauguration of the exhibition seen in the photo L to R Mr. Hari Shankar Singhania, Chairman J K Corp., Dr. Raman Singh, Union Minister of State for Commerce and Industry, Mr. S. Jagadeesan, Jt. Sec. Ministry of Industry & Commerce, Mr. Parmod Jain, President, IARPMA and Mr. M L Wadhwa, Tafcon watching the ceremonyetc.

If the Indian economy is expected to grow at over 7% in 2008-09 and at least 6% in 2009-10, why has the outlook for corporate capex deteriorated ?

We have to recognise that there has been a sharp decline in our GDP growth from 9.6% in 2006-07 to 9% in 2007-08 and 7% (or less) is expected in 2008-09, which means a growth loss of over 26%. Further, there is uncertainty about the growth outlook.

Capex plans are always related to expectations of growth. So, it is natural they will get affected. Further, the non-availability and high cost of finance are affecting the availability of resources and viability of capital expenditure.

Can cheaper credit alone solve India’s problem, given that there is limited room for a further fiscal stimulus ?

While cheaper credit alone is not the answer to the problem, cheaper credit will go a long way in Inaugural Function seen on the dias L to R Mr. M L Wadhwa, Tafcon, Mr. Raji Philip, CMD, HPCL, Mr. Parmod Jain, President, IARPMA, Hari Shankar Singhania, Chairman, J K Corp., Mr. Suresh Prabhu, Union Minister for Power, Govt. of India, Dr. Raman Singh, Union Minister of State for Commerce and Industry, Mr. S. Jagadeesan, Jt. Sec. Ministry of Industry & Commerce, Mr. N. Gopalaratnam, CMD, Seshasayee Paper & Mr. Jaideep Chitlangia, Vice President, IARPMArecovering confidence.

I think that there is considerable room for further fiscal stimulus. We can certainly come with a sustainable fiscal stimulus package. Sometimes you need to reallocate expenditure and/or reprioritise the expenditure in favour of such activities that are likely to give you immediate result. What we need is allocative efficiency.

What more can the government do to boost consumption demand and spur investments ?

Need for a stimulus package at this stage cannot be over emphasised. This is important in order to halt the current slowdown and putting the economy back on the rails. For this, it is necessary that goods and services are made cheaper and affordable.

Towards this end, reduction of excise duty is essential. Second, in certain sectors which are exposed to the threat of cheaper imports, government should increase the import duty by suitable margins. Third, the incidence of service tax should be brought down by at least 1.5 percentage point.

Fourth, government should reintroduce investment allowance to improve cash flows of the companies Mr. Suresh Prabhu, Union Minister for Power, Govt. of India releasing the Inpaper Directory, seen in the photo L- R Mr. Hari Shankar Singhania, Dr. Raman Singhand stimulate investments. Fifth, banks be asked to reduce the PLR at least by 1-1.5 percentage point. Sixth, bring down the interest rate on housing loan to the pre-crisis level.

Last but not the least, expenditure on infrastructure development, including housing, must be raised very substantially. Existing ongoing projects should be implemented on a war-footing. What is necessary is quick and timely action and implementation, for which I suggest a sort of war room be created in the Prime Minister’s Office.



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