BJP sets 12-point agenda for the economy

With the Lok Sabha elections round the corner and at a time when global financial turmoil is spreading its wings into the country, the Bharatiya Janata Party has come up with a 12-point agenda for the economy.
1. Liquid mutual funds are the most vulnerable part of the financial structure at the moment: last week, two liquid mutual funds had to be shored up; yesterday, three of them had to be given urgent assistance by LIC. First and foremost, a line of liquidity must be assured to them.
2. The government’s profligate fiscal indiscipline and its restrictive monetary policy have choked liquidity. That, compounded by the breakdown of confidence, has brought about a situation in which banks—and most of them are nationalised, government owned banks—are loathe to lend even to government-owned companies like the oil companies; they are loathe to lend even to each other. The result is that even for inter-bank lending, the rate has gone up to 22-23%. The 150 basis point cut in the CRR announced on 10 October is a first, but inadequate step. The CRR should be brought down to 5%.
3. Oil bonds and other off-budget items (such as fertiliser subsidies) need to be included in budgetary calculations as government borrowing. The UPA government has sought to fraudulently transfer these items out of the budget to hide its fiscal indiscipline and FRBM violations. Once we bring these items on to the government’s balance sheet, they can be converted into SLR bonds. With these measures, we will introduce further liquidity into the system.
4. When even government-owned oil companies are not getting credit, when government-owned banks are hesitant to lend even to each other for the shortest time, we can well imagine the condition of the small and medium enterprise (SMEs). They are today finding it impossible to get even their working capital financed. Hence, the government must, through Sidbi and other appropriate institutions, ensure funds for SMEs. Failure to do so will result in massive unemployment, and exacerbate social tensions.
5. For the same reasons, we are disturbed by reports we have received from the field that funds for the Rural Employment Guarantee Scheme are just not reaching the intended beneficiaries, and that loans against the Kisan Credit Cards have been just frozen. These blockages—which could not be inadvertent—must be opened so that funds are available to the farmers in particular.
6. The NDA government had striven hard to bring administered interest rates down – from 14.5% to 8%. This reduction of 650 basis points is what brought market interest rates down to 6%, and thus enabled, corporates to roll over their debt, and persons who could not have dreamt of owning a house to own one. The wholly misconceived hikes of interest rates during the last two years are now going to choke growth and yet done nothing —as they could do nothing—to stem inflation. Steps should be begun forthwith to bring the Repo rate down by 200 basis points by March 2009.
7. Today, NRIs are fearful of their savings. NRIs are looking for a safe haven for the savings. They also see that, because of their conservative policies, our banks are on firmer ground than banks elsewhere. Today, they cannot be paid more than Libor plus 75 basis points for their deposits—this at a time when the most creditworthy entities abroad are not able to get even short-term funds at Libor plus 400. For these reasons, (i) the restriction on interest rates to be paid to NRIs should be relaxed; (ii) The government and RBI should float the equivalent of the India Millennium Deposits and the Resurgent India Bonds which the NDA government had instituted to excellent results. Apart from other advantages, such a step will ease the pressure on the Rupee, and thus help stabilise the exchange rate.
8. We have consistently held the view that P-notes are being abused, and must be done away with. To open such a route when the foreign exchange situation is perilous is one thing. To keep it going when the situation is as comfortable as it has been in the last few years is to facilitate misuse by unscrupulous elements. The decision of the government to reopen this window at the height of a situation like the present one, is not just quixotic; it suggests a design. Today, when funds are being withdrawn, few would want to avail of this route for bringing money into India. We have received credible reports that the window is now being used for the opposite purpose—to take funds out anonymously. P-notes should be discontinued forthwith.
9. Speculative activity is contributing both to the downslide of the stock market as well as its extreme volatility. While our government has been continuing to slumber, others have moved even to suspend short selling in key scrips for specified periods. In our case, the ill-effects are compounded by a practice that is almost wholly absent in other countries— “naked short selling”. That is, shares being sold short by entities that just do not have them at all. Hence, naked short selling must be outlawed forthwith. And short selling itself must be regulated and made completely transparent.
10. For four years, the government has gone on debating what to do with foreign exchange reserves. A good proportion of them have been parked in US Treasury Bonds. These should be used instead to finance and thereby expedite infrastructure development here at home. India must set up a sovereign wealth fund, which is professionally and competently managed, to invest these reserves effectively.
11.This is the time to enable our banks to scale up. The government should enable them to go in for a major rights issue. This will immediately infuse liquidity into the banks, and at the same time enable them to become much stronger, and more competitive. Currently, the market capitalisation of our PSU banks is roughly about $40 billion. A $10 billion rights offering, with the government supplying its 60-70% share, will strengthen our banking system dramatically. The rights offering can be conducted in several tranches to avoid major capital commitments for minority shareholders. With the additional capital from the rights issue, our banks can lend more freely, they will be in a better competitive position relative to international banks, and they might even be able to acquire international assets at distressed prices.
12. Given the anxieties of FIIs, and their desire for safety as well as reasonable returns, the government should open up the Indian debt market further. Regulations should be altered to enable them to invest in and hold government and corporate bonds. These will provide them a safe asset as well as reasonable returns. And, for the country by helping dampen the pressures on them to withdraw funds from India, it will help stabilize the exchange rate.

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