Saturday, January 3, 2009

India gets more room to grow with Stimulus-II package

The government on Friday announced the second and final installment of its fiscal stimulus package. Complementing monetary easing by the Reserve Bank of India (RBI), the Centre enhanced the spending power of states with specific measures to boost credit availability.

It offered additional sops to exporters and the small-scale sector, besides raising the level of protection for cement and steel sectors a tad. It has also incentivised purchase of commercial vehicles.

Credit availability has been hiked in a variety of ways, the interest ceiling on external commercial borrowings has been removed; the cap on foreign institutional investments in the domestic corporate debt market has been jacked up two-and-a-half times from $6 billion to $15 billion; a special purpose vehicle is being created to lend to non-banking finance
companies to the tune of Rs 25,000 crore; Indian Infrastructure Finance Company is being permitted to raise another Rs 30,000 crore by means of tax-free bonds, and states are allowed to borrow an additional Rs 30,000 crore from the market.

In addition, public sector banks would be given additional capital to the extent of Rs 20,000 crore over the next two years, so they can lend roughly 10 times as much additionally.

The latest measures, which come in less than a month after the first package was unveiled on December 7, are aimed at benefiting housing, NBFCs that lend to infrastructure and finance commercial vehicles.

Announcing the measures, Planning Commission deputy chairman Montek Singh Ahluwalia said: “By no measure can we insulate our economy from slower growth, when the external factors are of such enormous magnitude. However, we will be able to manage a 7% growth this fiscal through these measures.”

Mr Singh added that these contra-cyclical steps and fiscal policy “in these truly exceptional circumstances” would ensure that growth momentum would be maintained next fiscal, which, he said, would be tougher than this year. But such counter-cyclical fiscal activism has to pay a price in the form of a higher fiscal deficit.

“Considering the implementation of the Sixth Pay Commission, the consensus within the government was a fiscal deficit of 3%. The mid-term review of the economy said that the fiscal deficit would be over 5%, excluding the below-the-line items such as fertiliser and oil subsidy. If we include these items, the fiscal deficit could exceed by 3% of gross domestic product, what was being targeted,” said Mr Singh.

The budgeted target for the fiscal deficit is 2.5% of GDP. The global financial meltdown has already forced the US and some other major developed countries into recession, and hit India too. This year, the economic growth is expected to be around 7%, down from the 9% average of the past three years.

The first stimulus package, estimated at over Rs 30,000 crore, included a 4% across-the-board cut in excise duty for the remaining part of the financial year and an additional Plan spending of Rs 20,000 crore.

“Because of slowing industrial output and resultant tax receipts, the government will have to forego about Rs 40,000 crore this fiscal. This is a rough estimate in a dynamic situation and improved production because of the steps taken could offset part of it,” said finance secretary Arun Ramanathan.

To facilitate access to funds for the housing sector, companies developing integrated townships have been allowed to borrow overseas with prior approval of RBI. The ceiling on interest rates for all overseas borrowings has been removed to provide flexibility to companies to borrow abroad.

Source: Agencies

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