Commerce Minister ‘Strongly Recommends’ a 200 Basis Point Rate Cut

A week after Urjit Patel was named the new Reserve Bank of India Governor, the Commerce Minister Nirmala Sitharaman told reporters in a briefing on Wednesday that she “has no hesitation in recommending 200 bps rate cut” to the RBI.

The minister said affordable credit was necessary to boost India’s manufacturing sector, adding that high interest rates are adversely affecting small and medium enterprises.

“I still hold the cost of credit in India is high...undoubtedly, particularly for small and medium (industries), who create a lot of jobs for us, who contribute 40 percent of all engineering exports in this country.. and are all hard pressed for money. And for them approaching a bank is no solution because of the prevailing rate of interest. So I have no hesitation to say, yes, 200 bps (rate cut) I would strongly recommend,” Sitharaman said. She was responding to a question on expectations of a rate cut from the new RBI governor.

Sitharaman had pushed for a rate cut in beginning of 2015 on similar grounds. She had also written to the Finance Ministry and the RBI on the issue ahead of the monetary policy announcement earlier this month. The RBI left interest rates unchanged in its August 9 monetary policy review, adding that its stance remains “accommodative” despite upside risks to inflation. The next policy review is slated for October 4 this year.

She also directed banks to pass on the benefits of the rate cuts to industry.

She further urged banks to pass on the benefits of any future rate cuts to small industries: “They (small industries) may not have huge NPAs but that doesn’t mean that I need to discourage them, it’s time now for the Indian economy to have a breath of fresh air for all these smaller companies. Their competitiveness is being affected purely because of the cost of borrowing,”

She didn’t elaborate, however, on whether the central bank had room for such a deep cut in the policy rate.

FDI in Tobacco Sector

The minister said the government is treading a cautious path towards permitting foreign direct investment in the tobacco sector. “Tobacco is a health affected sector. We need to reduce tobacco growth in India in line with commitments made before the WHO (World Health Organisation).”

Permitting FDI in tobacco will not only contradict India’s commitments before the WHO but also encourage more companies to enter India which will in turn increase tobacco production, she added.

“We are looking at ways to provide alternate means/crops for tobacco farmers.. it is still being explored,” she said.

Unlikely to Reshape E-Commerce FDI Policy

On alleged violation of FDI norms by e-commerce companies with respect to hefty discounts, the minister said a grievance redressal mechanism is being developed with the consumer affairs ministry on board.

The government is firm on its stand that e-commerce companies must stick to the stated norms. “The DIPP secretary has been meeting the companies and they have assured that they are not giving discounts but the sellers on their platform are giving them,” she said.

RCEP Talks to Conclude in 2017?

With the December 2016 deadline of concluding trade negotiations with Regional Comprehensive Economic Partnership (RCEP) member countries looking bleak, the commerce minister said she is hopeful that the talks will be concluded by the end of 2017.

“India is keen on bringing in services debate during RCEP negotiations as no detailed discussion has taken place on liberalising this sector. India is working on common concession for RCEP member countries. The next meeting is due in November,” she said.

The negotiations on regional economic pacts with RCEP member countries started in 2013 which will cover trade in goods and services, competition, intellectual property rights, economic and technical cooperation among others. The member countries include 10 ASEAN countries like Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam, Myanmar and others and six of their trade partners which includes India.