FM asks industry to cut prices; willing to look at excise duty cuts

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New Delhi, Nov 18 (UNI) Finance Minister P Chidambaram today asked industry to go in for a price cut as a "classical response" to stimulating demand and expressed hope that the economy will bounce back to a nine per cent growth rate in the second half of next fiscal.

In his address to the India Economic Summit here, Mr Chidambaram listed some of the sectors which should go in for a price cut. These include hotels, real estate, airlines, car and two wheeler manufacturers.

The Finance Minister was of the view that the price cut can be a temporary measure and once the demand is propelled back, it could consider the issue in entirety.

Elaborating on this, he said banks have cut housing loans by 75 bps, but there are few takers for flats and houses. This is because when a buyer goes in for a house , he expects an appreciation for the price at which he has bought the asset. On the other hand, a person purchasing a car or two wheeler adjusts himself to the fact that his purchase will depreciate over time.

At the given price, there are few takers for the housing sector as most buyers are unsure as to whether there would be appreciation on their asset.

Mr Chidambaram said while it was correct that the profitability of the companies will take a hit in the short run, it was better than laying off workers, building huge inventories and increase Non Performing Assets (NPAs).

All in all the trick to get out of demand-led recession on the part of industry was by undertaking a price cut and all else would fall in place.

The Finance Minister was categorical that the government would do a balancing act of maintaining a high growth rate and keeping a strict control on inflation.

In a lighter vein, he said the luxury of criticising the government for whatever it does rests with those who sit on the other side on the dias, namely the industry.

When the government was acting with all the powers at its command to put out the fires of inflation, it was criticised for being too soft on propping growth.

Now when the world is in a slowdown phase and with concomitants impact on India's growth, it is being accused of not bothering too much to check inflation.

At the moment the primacy is to maintain a high growth rate, while not sacrificing the avowed goal of keeping prices under check.

Mr Chidambaram, when asked as to what was his expectation of future growth, said the year 2009 would see a change in the fortunes of the country with growth again going back to nine per cent, a figure maintained for the last four years.

The IMF projection for the next fiscal is 6.3 per cent of GDP growth.

On a question as to whether another rate cut was desirable, Mr Chidambaram said this was a prerogative of the Governor of the Reserve Bank of India.

He said it was desirable to have a lower rate of interest, but rate cut would have to take into account the level of inflation.

To the great delight of industry, Mr Chidambaram said the government was willing to examine a cut in excise duty to propel growth on a case by case basis. He would be willing to examine the issue sector wise and industry wise, if he is approached with the subject.

In this context, he said that the government has already lowered the excise duty at the beginning of the year from 16 per cent to 14 per cent.

The Finance Minister was participating in a session entitled 'Risk to India's economy in a post-crisis world'. The issue that was being examined was that India's total exports of goods and services account for 20 per cent of the economy, but the global financial crisis has triggered concerns in the impact of large foreign exchange outflow, the depreciating rupee and lowering equity values.

The discussion leaders included K V Kamath, Managing Director of ICICI Bank and CII President and Richard C Levin, President, Yale University.

Mr Kamath endorsed most of the points raised by Mr Chidambaram, including a price cut by industry, reduction in excise duty, a lower interest rate regime and the need to balance growth rate and inflation.

He said a further reduction of 200-300 basis points was called for, but it should be done in a phased manner while taking into account changing economic environment.

He said the Finance Minister was right on criticizing the banking industry for being slow in effecting the changes in interest rates, where lending and deposit rates both have to move Southwards.

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