Munjal in Delhi on Tuesday. Picture by Prem Singh

New Delhi, June 22: Indian industry needs to batten down its hatches because rising inflation and a looming interest rate hike are expected to change the business environment very soon, says CII president Sunil Munjal.

Munjal says inflation — already running at 5.5 per cent — is the big cause for worry.

“Inflation is clearly a cause for concern. We cannot stop it. Although we don’t see interest rates going up sharply at the moment, there is a possibility that they will in the near future. However, in the long-term (three to five years from now), they should come down,” Munjal told The Telegraph today.

Munjal favoured the imposition of cess to raise funds for social sector projects. The government has already indicated that it intends to slap a cess on all federal taxes to raise adequate funds for education and health. He said the move was a step in the right direction — but he added a simple rider. “The imposition of a cess is a favoured model, which is already used for infrastructure projects (like the highways programme). But the government should also make a matching contribution.”

Munjal said the proceeds from the cess should be deposited in a specific fund instead of being appropriated into a general pool which usually “delays the allocation of funds.”

The CII chief was confident that the government would go ahead with divestment. “Nothing will stop it. We need to utilise the resources effectively with the proceeds of divestment going towards infrastructure and social sector development.” In the past, the government has used the selloff proceeds to cap its fiscal deficit.

The government has already spoken about divestment of 49 per cent in profit-making PSUs, he added.

He said the new government had kept its options open for privatisation of loss-making PSUs and there could be many private companies interested in assets which could be turned around by imparting greater degree of efficiency.

Munjal said VAT needs to be in place and uniformly implemented on an all-India basis. “At the moment, no one is sure about its implementation. Initially, it seems that certain states might not follow it but at least the process will get kick-started,” he said. He suggested widening the tax base, incentives for creating additional capacities, investment in infrastructure and social sector and reduction and better targeting of subsidies.

CII also called for abolition of tax on dividend, saying dual taxation is detrimental.

Raising the pitch against job reservation in private sector, the apex industry association offered its forum for a national debate on the controversial issue. Instead of a patchwork approach, he said the government and industry should work in tandem to raise the educational level and capability of the socially backward classes to make them more “employable”.

“The chamber has already begun a dialogue with the government for a pro-active approach on the subject,” Munjal said.