With the stock market touching a five-year high, an expected bumper harvest, rising exports and the government having managed the widening current account deficit, Finance Minister P. Chidambaram on Friday said continued high inflation and reviving investment sentiment were the key challenges before the government.
Addressing a press conference here, Mr. Chidambaram said the current account deficit (CAD) would come down to $60 billion on the back of rising exports and declining gold imports. “Core sector growth, strong monsoon and healthy exports augur well for economic growth. There are still many challenges, most important being inflation and reviving investment. But I think there will be green shoots even in investment. We are confident that the measures taken by the Reserve Bank of India and our own measures at maintaining fiscal discipline will eventually bring about a moderation of inflation,’’ he remarked.
The markets seemed happy on the eve of Diwali with the benchmark Sensex touching a five-year high. However, it fell back after scaling a lifetime high on the last day of the Hindu Samvat year 2069 and still ended at a fresh closing record with a 32-point gain. The index climbed to an all-time high of 21,293.88 in intra-day trade, surpassing the previous record of 21,206.77 reached on January 10, 2008. It ended at 21,196.81, a gain of 32.29 points or 0.15 per cent.
Finance Minister P. Chidambaram o Friday expressed strong support for new investment proposals, asking corporates to start investing rather than sit on cash.
“Government will endeavour to get the long-pending Insurance Amendment Bill, which seeks to raise the FDI in the sector to 49 per cent from 26 per cent, passed in the forthcoming winter session of Parliament,” he said.
Referring to the Direct Taxes Code (DTC), he said the draft amendments had been finalised and would be placed before the Cabinet for approval.
Talking about current account deficit (CAD), the difference between the inflow and outflow of foreign exchange, Mr. Chidambaram said he was hopeful of reducing it to $60 billion, down from the earlier estimate of $70 billion. CAD had touched the all-time high of $88.2 billion or 4.8 per cent of the GDP in 2013-14.
Mr. Chidambaram said a good monsoon and a subsequent bumper farm output would ease the inflationary situation. “The budgetary target of 4.8 per cent of the GDP would be met and also the Rs. 40,000-crore disinvestment target. I am confident that we will be able to adhere to the red line on the fiscal deficit,” he added.
The Finance Minister said that during his recent visit to the U.S. he got the impression that U.S. investors continued to retain faith in India's economy. The investment cycle, which in his view had been revived, would gain momentum in next few weeks and months, the Minister said. By and large the rupee had stabilised, Mr. Chidamabaram said.
"But in my view it is still a little over what I would consider the appropriate exchange. There is no such thing called appropriate exchange rate, but it is slightly over the appropriate exchange rate level,” he remarked.
Referring to the issue of retrospective tax, he said amendments to the Income Tax Act would be introduced in Parliament only after the Rs. 11,200 crore-Vodafone tax case is resolved. The government has sought a non-binding conciliation with the British Telecom major to resolve the issue.
“The question is how we move forward. The amendment [to the IT Act] has to be moved, but I can move that amendment only after the Vodafone case is resolved,” he said.
He defended the RBI’s decision to raise the short-term lending (repo) rate by 0.50 per cent in two tranches, saying it had to be viewed in the context of inflation and the depreciating rupee. “The market seems to be very happy. More than anyone else the market seems to welcome the RBI and government measures. But I would caution investors against excessive exuberance.”
