Tuesday, January 6, 2009

Stimulus Economic Package

The Deputy Chairman of the Planning Commission Montek Singh Ahluwalia has announced the second and maybe the last stimulus package for the economy by the UPA Government.The package which comes along with cut of Reverse Repo and Cash Reserve Ratio(CRR) by the Reserve Bank of India(RBI),is intended to prove adequate credit in the economy that has been showing since September 2008.
The package includes increase in plan expenditure upto Rs.20,000 crore so as to strengthen the ongoing programmes in rural,infrastructure and social security schemes.In addition to this,the Government has taken measures to make liquidity and easy credit available to industries,infrastructure developers and exporters.To give a boost to the sagging industrial sector,an across the board four per cent cut in advaiorm cenvat rate has been announced.
India Infrastructure Finance Limited will raise Rs.10,ooo crore to refinance banks’ lending for infrastructure projects.Corporate houses accessing credit from outside India will see further liberalization of External Commercial Borrowing(ECB) norms.Corporate bond market will see an increase in foreign institutional investment limit in rupee denominated corporate bonds from $6 billion to $15 billion.
The Government will allow development of integrated townships and access ECBs to give boost to the housing and construction sectors,which are facing severe pressure.As a key measure to revive the economy,the stimulus package will facilitate funding of about Rs.25,000 crore for pending highways and port projects.
The stimulus package marks a clear shift from reining in inflation to spurring growth in the grim scenario of a crumbling financial system and recession in the West so as to minimise the slowdown impact,even as the Government’s total revenue loss in 2008-09 is officially expected to be Rs.40,000 crore with a fiscal deficit of about six per cent of the Gross Domestic Product(GDP),as per the Planning Commission estimates.
While the RBI slashed its key policy rates yet again to inject an additional Rs.20,000 crore into the banking system,the Government has asked the Public Sector Banks(PSBs) to hike their credit targets for the fiscal so as to ensure optimal disbursal of funds at least cost.Inflationary pressures are easing and additional liquidity is being made available to PSBs at cheaper rates.
Since October2008,the RBI has pumped over Rs.3,20,000 crore into the monetary system to usher into a low interest regime,especially when inflation was coming down in the wake of the fall in the prices of fuel,metals and farm commodities.
Other measures designed to counter the withdrawal of countervailing duty (CVD) exemptions on import of certain steel products and cement which were provided earlier to contain the price spiral.
Reason to Smile
The latest package followed much-awaited RBI rate cuts.The repo---RBI’s lending rates to banks---and reverse repo---the rate it offers to banks for depositing surplus funds---were cut to 5.5 per cent and four per cent respectively.This incentivises banks to lend rather than to park money.The CRR ---money banks must keep in reserve---was also slashed to lubricate the system.Credit-starved consumers and reason to smile since banks have less ground for continued risk-wariness.India’s interest rates are one of the highest in the world and can afford further trimming to lift demand,more so since inflation is at a nine-month low of 6.38 per cent and is expected to fall further.
The second stimulus package lays emphasis on tweaking rules and procedures to address the concerns of specific sectors.Rules regarding ECBs have been substantially relaxed.Some of these measures are welcome but their efficacy in a counter cyclical package is limited.Foreign investors who have been fleeing equity markets may not be enamoured of debt instruments,especially when the corporate bond market is in a nascent stage of development.ECBs tend to increase the level of short-term external debt and overseas lenders continue to be risk averse.The reliance on monetary measures,understandable in a situation where the fiscal position is under stess,is unlikely to produce immediate results.
As banks deposits are set to fall,the Government-guaranteed bonds will offer an investment opportunity to risk-averse people with surplus cash.Since inflation is coming down,the RBI has signaled banks to reduce interest rates.Another round of rate cuts cannot be ruled out.The interest rates are,or close to,zero in countries like the US,China and Japan.
Heat of Recession
Despite its relative insulation from the global economy,India is bound to feel the heat of recession in the rich world.A period of painful adjustment is inevitable.More steps are,therefore,needed to ease the pain.The Government need not wait any more to further slash the oil prices.Besides,it is not enough to throw money at housing,infrastructure and other projects.These must be viable and efficiently executed without delays and without sharks---which have been proliferated during the last few years in the system---eating away large chunks of money meant to be spent on projects.
* To boost investment and spending;and revive growth.
* To revive exports,which fell in October 2008,causing a contraction in industrial production.
* To help reality sector.
* To sustain growth momentum with focus on infrastructure.
* To make more credit and funds available.
* To bail out transport sector.

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