INDIAN ECONOMY IS SAFE AND SOUND: CHALLENGES AHEAD

The economic meltdown in the US and Europe has taken a big toll and the economic crisis in the
developed world reached a new depth. The US and European governments have become hyper
active to arrest the losses and to put back the faith in their respective economies, banking system, investment business and financial services sector. The business scenarios in India seem to have been impacted by poor sentiments, falling commodity prices and negative news flowing from the western countries. The substantial reduction in market cap in Indian stock exchanges has further impaired the sentiments. The chartered accountants community and its leadership has been trying to diagnose as to whether there are any symptoms of serious financial problem in the Indian economy and more particularly in the financial sector including banks, insurance companies, non banking financial companies and other important constituents of financial markets and Indian economy. The reflection of global melt down is also appearing on Indian economy. The question is being asked whether Indian economy is safe and sound. The Indian economy is completely resilient and there are no reasons to have pessimism or lack of confidence. The fall in shares prices is partly a natural correction and partly arising out of panic sales and negative sentiments. The banks in India are safe in view of very severe regulatory mechanism of Reserve Bank of India and detailed audit being conducted by chartered accountants who are independently appointed, more importantly in the public sector banking system. But we cannot sit pretty confident that nothing is going to impact Indian economy. We have to review the entire regulatory mechanism and take appropriate steps to build
reasonable protection mechanism. In respect of private sector banks and mutual funds as well as
private sector insurance companies, there are neither negative signals nor are there symptoms of any impropriety. How the reporting by the private sector banks, mutual funds and insurance companies can give more confidence about it being true, fair, proper and completely transparent will depend on
the independence of audit. Most of the time in these cases the appointing authority and those in charge of management are not independent of each other and therefore there is a great degree of risk in the system. It is important for the society, Government, RBI, SEBI, IRDA and all other regulatory bodies; and most importantly the political leadership of the country to consider that in certain cases large scale public funds are involved and the funds contributed to a particular business by the owners of the business are fairly insignificant proportion and in some cases even less than 10% of the entire business assets e.g in mutual funds, banks and Insurance companies. Auditors also have a very important role to play in all such cases. It may be necessary that Auditors/special joint auditors are
appointed by an independent Regulatory Authority. In such case the scope, coverage and reporting
requirements can be foolproof and the auditors’ independence is not impacted. Auditors’ appointment, remuneration, continuation and removal has to be independent of owners and those directly or indirectly in-charge of management. In addition to India, even the international community including G20 summit which is happening at the behest of US should consider as to
whether the accounting practices, reporting requirements and most importantly the audit process of their financial sector is factually independent and a debate is necessary towards shifting the appointment of auditors through regulatory mechanism so that such auditors are directly answerable to these regulators as well as to the society. Hectic activities are going on in the area of convergence of accounting standards world over. Fair Valuation is being considered as better basis of accounting than historical cost. In the present circumstances, this definitely requires a relook.

The Indian economy, the Indian businesses, Indian banks as well as Indian financial sector is fully safe based on the informal feedback being received by the chartered accountants community from various quarters including most importantly through the informal networking of Chartered Accountants as auditors, tax advisers and management consultants, CFOs and CAs at other managerial positions and working closely with the business community. There appears to be no
serious problem in the economic and business framework of the country. However, it is important to ensure that the business sentiments are restored and the government of India needs to –

• Significantly reduce indirect taxes in those sectors which may be impacted due to lack of export, international trade and considerable reduction in commodity prices. The tax burden is too high in almost all sectors and need a candid review.
• The compliance's burden is to be reduced significantly.
• We suggest that the government should immediately commit at least Rs. 200,000 crore towards infrastructure projects and start inviting contracts and take steps to implement the same. This will boost the economic sentiments very significantly and the multiplier effect will rejuvenate the economy.
• The interest rate for hotel industry, real estate sector and housing below the cost of Rs. 50 lakhs needs to be considerably reduced by at least 500 basis point. The risk factors determined by RBI also require positive reconsideration. 
• The liquidity in the system has to be further increased by further reduction of SLR and CRR.
• A fresh dose of cut in the REPO rate is very necessary.
• The oil prices need an immediate reduction in view of 60% reduction in international prices.