ICICI, Bajaj Say India Needs to Reduce Rates, Taxes

By Subramaniam Sharma and Cherian Thomas

Nov. 16 (Bloomberg) -- India needs to cut interest rates, lower taxes and draw up a stimulus plan to help shield the economy from a global slowdown, business leaders said.

Rates need to be cut ``by 200 to 300 basis points,'' K.V. Kamath, chief executive officer of ICICI Bank Ltd., the nation's second-biggest, told the World Economic Forum's India Economic Summit in New Delhi today. The government should also cut taxes and pump money into infrastructure projects, said Rahul Bajaj, chairman of Bajaj Auto Ltd., India's No. 2 motorcycle maker. A basis point is 0.01 percentage point.

Indian companies are struggling as the global credit crunch makes it harder for them to borrow and a looming world recession damps exports. Prime Minister Manmohan Singh told the Group of 20 nations meeting in Washington yesterday that India's pace of economic expansion may slow to between 7 percent and 7.5 percent this year, from an average of about 9 percent in the past four.

``Recession will hit the export performance of developing countries and the choking of credit, combined with elevated risk perception, will lead to lower capital flows and reduced levels of foreign direct investment,'' Singh said. ``The combined effect will be to slow down economic growth in developing countries.''

Finance Minister Palaniappan Chidambaram and central bank Governor Duvvuri Subbarao have been loosening fiscal and monetary policy to cope with a liquidity shortage that began in September as the global financial crisis unfolded, putting pressure on India's money and foreign-exchange markets.

Boosting Liquidity

The Reserve Bank of India yesterday announced more measures to boost cash in the financial system after cutting interest rates twice in less than a month to prop up growth.

The central bank has cut its benchmark lending rate to 7.5 percent from a seven-year high of 9 percent. It also pared the amount lenders must set aside as reserves to cover deposits by 3.5 percentage points in a month, freeing up as much as 1.4 trillion rupees ($29.5 billion) in cash to ease lending.

Anilkumar M. Naik, chairman of Larsen & Toubro Ltd., India's biggest engineering company, also called for lower borrowing costs to shore up the economy. ``Development will suffer'' on account of high interest rates that need to be reduced, he said in New Delhi today.

The company has slowed hiring, although it expects industries such as railway and power companies to take up some of the slack. Larsen & Toubro depends on orders to build plants for steel and automobile companies that are delaying or curtailing expansion plans.

Fiscal Stimulus

Bajaj, who wants key rates and the cash reserve ratio cut further, said India needed a fiscal stimulus plan along the lines of China's $586 billion program to bolster growth.

``Growth has to be stimulated by fiscal stimulus,'' Bajaj said. ``My concern is that the efficiency with which we implement these policies leaves something to be desired.''

India, which may not be able to match the China plan, should ensure the prime minister's five-year $500 billion infrastructure spending target is met, Bajaj said.

``The government should follow pro-growth policies,'' Bajaj told the WEF meeting today. ``The government should consider reductions in indirect taxes like excise duties on some products to increase demand.''

He called on the finance minister to help Indian business bring prices down.

ICICI's Kamath said inflation would continue to decline and come within a range of 4 percent to 5 percent in the next three to four months. The decline in crude oil prices would encourage this trend, allowing further cuts in interest rates, he said.

Inflation Slows

India's inflation rate fell the most in at least 18 years in the week to Nov. 1 to 8.98 percent, giving the central bank room to make further unscheduled interest-rate cuts. Inflation has fallen to the lowest level in five months as it dropped from a 16-year high of 12.91 percent in the week to Aug. 2.

Many state-run banks including ICICI's rival State Bank of India were persuaded by Finance Minister Chidambaram to cut lending rates for their best borrowers.

The central bank decided to extend the period for rupee loans to 270 days from 180 days to help exporters fighting the slowdown in demand, as part of yesterday's measures.

India's exports grew 15 percent in September, the slowest pace in 18 months, as the weakening global economy damped demand. Overseas shipments, which account for about 15 percent of the economy, rose 10.4 percent to $13.7 billion from a year earlier, after gaining 27 percent in August.

Rupee, Stocks Drop

The Indian rupee had the biggest weekly drop in a month as of Nov. 14 on concern a recession in the world's industrialized economies will increase risk aversion and erode demand for emerging-market assets.

The rupee has declined 13.4 percent in the past six months, making it the third-worst performer among Asia's 10 most-active currencies, as the global financial crisis caused investors to sell local equities.

The benchmark Bombay Stock Exchange Sensitive Index has dropped 54 percent this year as overseas investors have pulled out $12.7 billion from stocks this year as of Nov. 12, after buying a record $17.2 billion of equities in 2007.

To contact the reporters on this story: Subramaniam Sharma in New Delhi at ssharma@bloomberg.net; Cherian Thomas in New Delhi at cthomas1@bloomberg.net.