Govt unveils Rs 30,700-cr stimulus package

The government on Sunday unveiled a Rs 30,700-crore fiscal stimulus package mainly comprising additional spending and excise duty cuts Global stimulus pkg
India battles crisis
Highlights of package

aimed at boosting consumption, the latest in a flurry of measures being rolled out by policymakers, keen to steer the economy away from a painful slowdown.

The government’s fiscal package, announced a day after the central bank cut a key interest rate, has Rs 20,000 crore in additional expenditure, an across-the-board 4% excise duty cut amounting to Rs 8,700 crore and benefits worth Rs 2,000 crore for exporters.

In addition, the government hopes to precipitate infrastructure projects worth Rs 100,000 crore through faster clearances of public-private partnership projects, and ensure their easier financing by way of a tax break on fund raising by the India Infrastructure Finance Company, a specialist lender to the infrastructure sector.

The government will also take steps to ensure that already budgeted expenditure of Rs 300,000 crore will actually be spent over the next four months of the current fiscal to end-March 2009, as it increasingly resorts to pump-priming to shore up the economy that continues to face headwinds from the global financial market turmoil.

These measures complement Saturday’s one percentage point cut in the repo rate cut announced by the central bank, and the refinance facilities for housing and small and medium industries that are designed to boost the flagging realty and manufacturing sectors.

Planning Commission deputy chairman Montek Singh Ahluwalia told reporters that the government would not hesitate in taking further expansionary measures if the economic situation worsened. The latest measures will lift the government fiscal deficit above its target of 2.5% of gross domestic product this year, Mr Alhuwalia said, adding that a higher fiscal deficit was tolerable in the current environment and was an appropriate “counter-cyclical” policy.

“It is a desirable step in times of external contraction.” The fiscal package drew a mixed response from industry. Car manufacturers reacted positively and promised to pass on the duty cuts to consumers, which will bring prices down by between Rs 8,000 and Rs 45,000. Public sector banks are expected to announce easier terms for housing, auto and personal loans on Monday.

“We were anticipating a package of Rs 70,000 crore. A few sectors such as steel, cement, construction and real estate need boost from the government,” said Assocham president Sajjan Jindal. The trade body is expecting another package of around Rs 30,000 crore in January.

“Given the extent of problems that are being faced by the industry, we hope that Sunday’s announcement is only part of the total fiscal package and more such measures will be seen in the near future,” said CII director general Chandrajit Banerjee.

An official statement said the government has been concerned about the impact of the global financial crisis on the Indian economy. The global crisis has already forced several developed economies into a recession, and hit India too. The economic growth this year is expected to ease to around 7%, down from the 9% average of the past three years.

Instead of cutting duties selectively, the government has cut the Cenvat or excise duty by 4% on all products barring petroleum products. The three major rate slabs of central excise duty, of 14%, 12% and 8%, will now stand at 10%, 8% and 4%, and Mr Ahluwalia said the government was hopeful that companies would pass on the benefit of the cuts to consumers.

This could give a fillip to domestic demand in sectors such as automobiles, consumer durables and cement that are most affected by the economic slowdown. The package provides Rs 1,450 crore to the export sector, which for the first time in five years saw a 12% drop in October. Exporters will get refunds of terminal excise duty, a lower interest rate of 7% for pre- and post-shipment credit for sectors such as handloom, textiles, leather, marine, gems and jewellery and small and medium enterprises.

It allows labour-intensive medium, small and micro enterprises collateral-free lending on loans of Rs 50 lakh up to Rs 1 crore. Besides, the lock-in period for loans under an existing credit guarantee scheme are being cut to 18 months from 24, a move that will encourage banks to give more loans to the sector. RBI has already announced an increase in refinance facilities to SIDBI, which lends to small enterprises.

The housing and infrastructure sectors also received significant emphasis in the government package. To ensure that infrastructure projects are not starved of funds, the government allowed the India Infrastructure Finance Company to raise Rs 10,000 crore by way of tax-free bonds, giving it a larger pool of funds to refinance long-term loans to the sector. The power sector has been allowed duty-free import of naptha.