CII concerned over increase in states' fiscal deficit

KOLKATA: The Confederation of Indian Industry is apprehensive that appreciation of the Indian rupee and the dismal condition of the state governments'' finances may "cloud the significantly positive outlook for the economic growth" of the country.
In view of the good rainfall, CII revised the country''s GDP growth forecast to anything between 6.5 per cent and 6.8 per cent compared to the previous GDP target of six per cent to 6.4 per cent.The CII has revised the GDP estimates on the basis that agricultural output would increase between four per cent and 5.5 per cent.
Expressing concern over the appreciating rupee, a CII document said during the past year, the rupee appreciated by 4.7 per cent against the greenback and the "appreciation has been particularly sharp over the last quarter".
CII feels that the differential in domestic and foreign interest rates was creating “artitrage driven inflows�. This sustained currency appreciation, said CII, would be “a new challenge to the competitiveness of Indian manufacturers as they have to evaluate whether their products cost less than imports in rupee terms�.
Expressing concern over the “alarming increase� in fiscal deficit of states, CII noted that since 1994-95, state governments have been financing their deficits by bond-financed special purpose vehicle (SPVs), backed by government (state) guarantees. But, “most of them are worse than junk bonds, backed by the promises of fiscally bankrupt states�, it felt.
CII felt that if the issue was not “tackled immediately�, it might explode as “payment defaults� which in turn would affect respective bondholders like state cooperative banks and ultimately their deposit holders.
In his prescription on tackling rupee appreciation, CII chief economist Omkar Goswami advocated that it could be contained either by issuing infrastructure bonds or by adjusting the repo rate. Goswami, however, was of the view that since floating of infrastructure bonds would invite a structural change, “perhaps an adjustment of the repo rate would be a better course of action�.
Referring to inflation rate, CII felt that in the current fiscal the average inflation would hover around five per cent while inflation in the manufactured products is likely to be lower at around 4.5 per cent.