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Room for further interest rate cut by RBI: FM

Tokyo: Finance Minister P Chidambaram on Tuesday argued for further interest rate cut by the Reserve Bank as headline inflation has softened and there is a need to push growth to the potential level of 8 per cent.

"Well, I think so. We see the beginning of green-shoots, more enquires for loans and there are more project proposals, stalled projects people are beginning to enquire."

"I think at this time perhaps there is still a room for cutting interest rates, but let me add …that is the call the (RBI) Governor has to take," he said in an interview here.

He was replying to a question whether there was a case for further lowering of interest rate.

The government, he added, would continue to argue for interest rate cut by the RBI which is slated to announce monetary policy for 2013-14 on May 3.

"The RBI has to weigh the fact that headline inflation has come down yet consumer price inflation is sticky…it has to keep current account deficit in mind before it lowers interest rate."

"But government is always pro-growth and the government will always argue for lower interest rates," the Minister said.

Chidambaram, who is here to woo investors, said although inflation based on movement in wholesale prices has come down, retail inflation in double digits continues to be a cause of concern.

He said India's growth potential is 8 per cent and the country can grow at the rate for the next 20-25 years.

"We can easily grow at certainly more than 7 per cent and close to 8 per cent… our potential rate of growth is 8 per cent. We have achieved it in the past between 2004 and 2008…we had 9 per cent growth in some of these years. I think we will climb back in 2013-14. We will climb back to 6 per cent plus in 2013-14 and in 2014-15 we should get back to 7-8 per cent growth", he added.

Chidambaram said the government has been addressing various concerns being raised by the industry in the past couple of years and was working to make India a more attractive destination for foreign investment.

"We have always been open to business. Some concerns may have risen in the past couple of years. We are addressing those concerns. India's potential growth rate is close to 8 per cent and we think we can grow at that rate for the next 20-25 years. Few country can make that claim," he said.

As regards inflation, Chidambaram said the core inflation and the headline inflation have come down, but "the consumer price inflation is still very sticky at double digits and that's what affects the people".

On whether the coalition government was impacting decision making, Chidambaram said it had not impacted governance in India and added that several countries are having coalition governments.

"We know how to manage a coalition…Coalitions are not something novel or unprecedented. We have coalition government over nine years from now. We have passed many important bills and taken many reform measures, not one of them have been reversed, because we are in coalition… investors should look at the government as a whole and not worry too much about how we manage coalition," he added.

Chidambaram said insurance, banking and asset management companies have shown keen interest on investment in India and they are welcome.

"Insurance companies, large asset management companies are very keen to invest in India. I think there is great deal of interest among banks and insurance companies to gain a footprint in India, we welcome all of them."

"We have very transparent rules and in the financial sector there is a lot room for new players. So, my impression is that they are extremely positive about India. India is a safe destination," Chidambaram said.

On the suggestion of devaluing rupee to slow down imports, he said: "That may not work in a country that is dependent on oil imports. We import some coal, we import capital goods, we import edible oil, pulses."

"These are very essential imports and I think that the fact that the rupee depreciation may not slow down imports. In fact, it may lead to exact opposite result. Our import bill will go up in rupee terms. I am not sure whether depreciating the currency is the answer to the current account deficit (CAD)", the Minister added.

The CAD, which is the difference between inflow and outflow of foreign exchange, shot up to a historic high of 6.7 per cent during the quarter ending December mainly due to high imports of oil and gold.

On concerns over taxation issues, Chidambaram said, "These are concerns mostly by some western companies…there is a concern about erosion of tax base."

"These are being addressed by making a rule on transfer pricing, rules on arm's length pricing. Some of these will of course hurt MNCs which do not want to pay taxes," he said, adding these issues do not concern Japanese companies and were not raised during his meetings with investors.

"You can be in India, you can do business, you can make profit but you will have to pay taxes," the Minister added.

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