indian government stimulus

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INDIAN GOVERNMENTS

STIMULUS FOR RECOVERY

OF THE ECONOMICDOWNSWINGPrepared By:

Nikhil Chandra 28064

Ravinder Goel 28067

Saikat Roy 28070

Tarun Agarwal 28073

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Aditya Grover 28076

Batch 2008-2010, Section C, NIILM-CMS, New Delhi

INDEX

S.NO. CONTENTS PAGE (S)

01. Project Abstract 3

02. The Gravity Of The Situation 4 5

03. Stimulus Package I 6 11

04. Shortfalls Of Stimulus Package I 12 15

05. Bailout Packages By The Indian Government 16 17

06. Current Political Situation 18

07. Demands For The Second Stimulus Plan 19 25

08. Stimulus Package II 26 30

09. Shortfalls Of Stimulus Package II 31 32

10. Future Prospects 33 37

11. Ray Of Hope 38 39

12. Managerial Implications And Suggestions 40 43

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13. Bibliography 44 45

PROJECT ABSTRACT

This research project was conducted on the Indian governments stimulus packages given toboost the economy of our country. The first stimulus was announced on 7 th December 2008 and thesecond stimulus on 2nd January 2009.

The focus period of study for this research project has been the period between 5 th December2008 and 5th January 2009. Data was also significant during the period of 1st October 2008 to 4th

December 2008. Overall, the data was analyzed for the Global as well as the Indian Financial Fiasco

Scenarios through the period of 28

th

April 2008 to 5

th

January 2009.

The aim of this research project was to study the global economic environment and ascertainwhether the steps taken by the Indian government to revive the economy are truly progressive or justan eyewash.

Indian government was comparatively very late to come to terms with the global economicmeltdown as compared with other huge economies like the United States of America, China, theEuropean Union, the Russian Federation, South-east Asian countries, Japan and Korea. This move towait and watch and then infuse liquidity into the economy has been largely disastrous for the UPAcoalition government.

The timing was especially bad considering that the general assembly elections are due in May2009 and considering the fact that they introduced the sixth pay commission at a time when the countrywas witnessing the fall of inflation. The present government was well aware of the sub-prime /mortgage crises situation facing the western world since the year 2001.

The current stimulus measures were declared within a span of 27 days only. We will not get athird stimulus package for this financial year and the fiscal deficit has already widened by 2 percentagepoints.

This project thus, attempts to understand the chain of events leading to the announcement of thestimulus packages, the shortfalls and criticisms of the booster shots, the future predictions made aftereach stimulus push, the overall hope for the future and the implications of this governmental movefrom the managerial perspective.

This project hopes to find answers to questions still perplexing to the common man, the fineprint between the lines of the governments emergency policies, the politics of socialistic ideals and aneasy to understand managerial implication report that shall be of use to all concerned citizens of ourcountry.

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THE GRAVITY OF THE SITUATION

The outflow of foreign institutional investment from the equity market since July 2008 had been morethan $12.5 billion and the rupee had fallen by 20 percent. From a high of around Rs 39 to a dollar inJanuary 2008 the rupee had fallen to around Rs. 48 a dollar by October 2008.

The Sensex index, which in its rise from the 4,000 range in 2002-3 to over 20,000 at the start of 2008produced both endless ecstatic drivel in the business press and a flood of FII, had tumbled down to the9,000 range by October 2008..

The Reserve Bank of India sold $20.6 billion in October, according to the figures published in theDecember bulletin of the bank.

It was during October that the local currency faced severe pressure. The currency declined from about47 to the dollar at the beginning of the month to a little over 50 at the end of October. The decline inforex reserves during that period had prompted speculation that the RBI was intervening massively toprop up the local currency.

Since mid-October, the central bank has lowered its key lending rate by 250 basis points to 6.5 percentto shield the economy from the spillover of the global credit crisis.

It has also aggressively slashed banks' reserve requirements to shore up growth, which many expect to

slow to 7 percent in the fiscal year which ends in March from 9 percent in 2007/08.

The super spike in oil prices on the one hand and flight of capital on the other have been the twofactors that saw the RBI furiously sell off dollars to prop up the rupee, according to Dr D.K. Joshi,Director and Principal Economist at rating agency Crisil.

The RBI has so far in this fiscal sold close to $34 billion while purchasing $5.68 billion. The net sale of$28.3 billion would mean that an equivalent amount of Rs 1,20,000 crore has been removed from the

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banking system causing some liquidity crunch before the announcement of recent liquidity infusingmeasures.

The RBI buys dollars in the market when there is a heavy inflow of dollars as was the case in the lastfew years. This is done to prevent the rupee from appreciating beyond the level that the RBI iscomfortable with. A considerable part of the liquidity enjoyed by commercial banks during the past

few years owed its origins to the dollar inflows that were sucked out by the RBI. By placing rupees intheir hands and once again sterilising it by selling government paper to banks, the RBI was hoping tokeep inflation under control.During 2006-07 the RBI did not sell any dollars in the market. In 2007-08 also the RBI remained apurchaser of dollars except in March, when it sold about $1.4 billion. During these two years alone,the RBI had purchased about $100 billion which got added to the countrys forex reserves.

The RBI was also very active in the forward market for dollar purchase from October 2007 when theinflows were high. Its outstanding net purchase of dollars in the forward market was at a high of $17billion in April 2008 after which it has gradually reduced the net position to a mere $90 million inOctober 2008.

Since June this year, the RBI has had to intervene actively and sell more dollars than what it purchasedduring each month. There was a brief reprieve in August but things have taken a turn for the worseafter that.

The capital goods sector, which supplies machines to both sluggish manufacturing and laggardinfrastructure sectors, suffered a big jolt in October08, with a year-on-year growth falling steeply to3.1 percent, plunging from 20.9 percent in the same month a year ago.

Infrastructure industries, which club power, cement, coal, steel crude oil and petroleum in governmentclassifications, grew by 3.4 percent year-on-year in October08, down from 4.6 percent a year ago.

With growth in these sectors sluggish, the companies that supply machines and equipment for theirprojects also apparently suffered its consequences.

The liquidity problem in the month of October08 resulted in banks slowing loans which impactedseveral infrastructure projects.

The fall in the industrial output for the first time in 15 years is expected to result in companiesreporting lower earnings in the third quarter ending December 31, 2008 as well as the followingquarter ending March 31, 2009.

The core industry sectors including manufacturing, infrastructure and auto are expected to continue toregister a decline in growth in the coming two quarters.

The contraction in consumer goods both durables and non-durables - suggested that the 7 percentgrowth seen in the previous years would not be enough to sustain itself in 2008-09 and 2009-10.

High interest rates were a major cause of worry for the auto and realty sectors.

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The countrys aviation industry clearly showed a downward spiral on Friday with passenger traffic datafor November showing a 4.5 percent dip from October, signaling a somber mood of demandcontraction in a slowdown.

According to the data released by the Ministry of Civil Aviation, for November08, domestic airlinescarried 30.01 lakh passengers compared with 31.33 lakh passengers in October08.

The downslide in the industry was linked to high fares which in turn were linked to fare revisionscaused by high fuel prices of aviation turbine fuel.

STIMULUS PACKAGE I

1. Plan Expenditure:

In order to provide a contra-cyclical stimulus via plan expenditure, the Government has decided to seekauthorisation for additional plan expenditure of upto Rs 20,000 crore in the current year. In addition,steps are being taken to ensure full utilisation of funds already provided, so that the pace of expenditure

is maintained. The total spending programme in the balance four months of the current fiscal year,taking plan and non-plan expenditure together is expected to be Rs.300,000 crore.

The economy will continue to need stimulus in 2009-2010 also and this can be achieved by ensuring asubstantial increase in plan expenditure as part of the budget for next year.

2. Reduction in CENVAT:

As an immediate measure to encourage additional spending, an across-the-board cut of 4% in theCENVAT rate will be effected for the balance part of the current financial year on all products otherthan petroleum and those where the current rate is less than 4%. This shall will bring down prices of

cars, cement, textiles and other goods.

The Central Value Added Tax (CENVAT) on non-petroleum products would down to ten, eight andfour per cent for different categories.

3. Measures to Support Exports

i) Pre and post-shipment export credit for labour intensive exports, i.e., textiles (including handlooms,carpets and handicrafts), leather, gems & jewellery, marine products and SME sector is being mademore attractive by providing an interest subvention of 2 percent upto 31/3/2009 subject to minimumrate of interest of 7 percent per annum.

ii) Additional funds of Rs.1100 crore will be provided to ensure full refund of Terminal Exciseduty/CST.

iii) An additional allocation for export incentive schemes of Rs.350 crore will be made.

iv) Government back-up guarantee will be made available to ECGC to the extent of Rs.350 crore toenable it to provide guarantees for exports to difficult markets/products.

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v) Exporters will be allowed refund of service tax on foreign agent commissions of upto 10 percent ofFOB value of exports. They will also be allowed refund of service tax on output services while availingof benefits under Duty Drawback Scheme

4. Housing

Housing is a potentially very important source of employment and demand for critical sectors and thereis a large unmet need for housing in the country, especially for middle and low income groups. TheReserve Bank has announced that it will shortly put in place a refinance facility of Rs.4000 crore forthe National Housing Bank. In addition, one of the areas where plan expenditure can be increasedrelatively easily is the Indira Awas Yojana. As a further measure of support for this sector public sectorbanks will shortly announce a package for borrowers of home loans in two categories: (1) upto Rs.5lakhs and (2) Rs 5 lakh-Rs 20 lakh. This sector will be kept under a close watch and additionalmeasures would be taken as necessary to promote an accelerated growth trajectory.

5. MSME Sector

The Government attaches the highest priority to supporting the medium, small and micro enterprises(MSMEs) sector which is critical for employment generation. To facilitate the flow of credit toMSMEs, RBI has announced a refinance facility of Rs.7000 crore for SIDBI which will be available tosupport incremental lending, either directly to MSMEs or indirectly via banks, NBFCs and SFCs. Inaddition, the following steps are being taken.

(a) To boost collateral free lending, the current guarantee cover under Credit Guarantee Scheme forMicro and Small enterprises on loans will be extended from Rs.50 lakh to Rs.1 crore with guaranteecover of 50 percent.

(b) The lock in period for loans covered under the existing credit guarantee scheme will be reducedfrom 24 to 18 months, to encourage banks to cover more loans under the guarantee scheme.

(c) Government will issue an advisory to Central Public Sector Enterprises and request State PublicSector Enterprises to ensure prompt payment of bills of MSMEs. Easing of credit conditions generallyshould help PSUs to make such payments on schedule.

6. Textiles

(a) An additional allocation of Rs.1400 crore will be made to clear the entire backlog in TUF Scheme.

(b) All items of handicrafts will be included under 'Vishesh Krishi & Gram Udyog Yojana'.

7. Infrastructure Financing

A large number of infrastructure projects are now being cleared for implementation in the PublicPrivate Partnership mode. These projects may experience difficulty in reaching financial closure giventhe current uncertainties in the financial world.In order to support financing of such projects, Government has decided to authorize the IndiaInfrastructure Finance Company Limited (IIFCL) to raise Rs.10,000 crore through tax-free bonds by31/3/2009.

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These funds will be used by IIFCL to refinance bank lending of longer maturity to eligibleinfrastructure projects, particularly in highways and port sectors. In this way it is expected that IIFCLresources used for refinance can leverage bank financing of double the amount.

Depending on need, IIFCL will be permitted to raise further resources by issue of such bonds. Inparticular, these initiatives will support a PPP programme of Rs.100,000 crore in the highways sector.

8. Others

(a) Government departments will be allowed to take up replacement of government vehicles within theallowed budget, in relaxation of extant economy instructions.

(b) Import Duty on Naphtha for use in the power sector will be eliminated.

(c) Export duty on iron ore fines will be eliminated and on lumps will be reduced from 15% to 5%.

(d) A four per cent cut in ad-valorem duty.

9. Aviation

(a) The government will impress upon state governments to grant declared goods status to aviationturbine fuel (ATF) or jet fuel to help airlines tide over the high cost of fuel. India is one of the mostexpensive places to tank up for airlines with a diverse taxation structure across states that levy taxesranging from 4% to 30% on aviation fuel.

(b) Air India to slash fares by Rs 400.

The Government is keeping a close watch on the evolving economic situation and will not hesitate totake any additional steps that may be needed to counter recessionary trends and maintain the pace ofeconomic activity.

As part of steps to create demand in the economy that is expected to grow by over 7 per cent the totalspending programme in the balance four months of the current fiscal year i.e. December08 toMarch09, taking plan and non-plan expenditure together is expected to be Rs 300,000 crore (Rs 3,000billion) apart from the Rs 35,000 crores fiscal package of Stimulus I that has been reviled by thegovernment.

10. Fertilizers

Government issues bonds worth Rs 4,000 crore as fertilizer subsidy

The government today issued bonds worth Rs 4,000 crore to 16 fertiliser companies to compensatethem for selling the key agricultural input to farmers at low prices.

The 14-year special bonds carry a coupon rate of 6.20 per cent.

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Of the bonds, the largest share was issued to Indian Farmers Fertilizer Co-operative, which got morethan half of the worth of total bonds. The cooperative got bonds worth Rs 2,106 crore.

Other firms which got bonds include Chambal Fertilizers & Chemicals, Tata Chemicals, Gujarat StateFerilizers and Chemicals, Rashtriya Chemials and Fertilisers, Indian Potash and Paradeep Phosphates.

Earlier this month, the Centre got parliamentary approval for an additional subsidy of Rs 6,000 crore tothe fertiliser sector in the second supplementary demand for grants, taking the total for this purpose tonearly Rs 89,000 crore this year.

11. Home loans

Govt may restrict home loan rates to 7-8%. The government is pushing state-owned banks to offerinterest rates on housing loans up to Rs 20 lakh (Rs 2 million) at pre-2004 levels. This would meanconsumers could get home loans at 7 to 8 per cent, 2 or 3 percentage points lower than the currentmarket rate of 9.5 to 10.5 per cent.

Public sector bankers indicated that they have received signals to lower pricing of home loans up to Rs20 lakh. Finance secretary Arun Ramanathan is likely to meet some public sector bank chiefs for anaction plan. The contours of the package are likely to be ready early next week. The government onSunday had said state-owned banks would announce a package for home loans up to Rs 20 lakh.

The government may also bear the interest risk -- the movement in the market rate against a fixed ratethe lenders will charge borrowers of such loans.

Home loans up to Rs 500,000 may attract interest of around 7 per cent and those above Rs 500,000 andup to Rs 20 lakh around 8 per cent, sources said. With interest subvention, the actual interest realisationfor banks may be around 10 per cent.

State-owned banks have reduced interest rates from as high as 11 to 12 per cent to 9.5 to 10 per cent.Deposit rates may fall further after RBI's recent rate cuts. The average cost of funds for banks is 6 percent now.

Regarding reduction in lending rates, some private banks have announced a cut in home loans. Otherbanks are taking a fresh look on their lending rates for various segments and are expected to come outwith a response sooner than later.

12. Consumer Durables

Consumer durables may be cheaper. High-end consumer durables such as plasma TVs, washingmachines and refrigerators may get cheaper by up to Rs 3,600 as manufacturers work out ways to passon the benefit of the four per cent cenvat cut to consumers.

"Consumer durables maker will certainly pass on the excise tax benefits to the customer and I foreseearound 3-5 per cent reduction in prices across the segment," said Consumer Electronic AppliancesManufacturers Association Secretary General Suresh Khanna.

Following the government notification, consumer durables firms will now have to pay anwyherebetween 4-10 per cent Cenvat (as opposed to the earlier 8-14 per cent). The countervailing duty

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(CVD), too, gets reduced proportionately to the lower excise duty rates, said Shailesh Seth, indirect taxadvoctate, adding that "the rates have been reduced not only for finished goods but on inputs like steeltoo".

LG Electronics India Head Amitabh Tiwari said: "Our high-end products such as LCD and plasmaTVs, refrigerator and washing machines will see a reduction in prices by around 1.6 per cent."

However, V Ramachandran, Director, Sales & Marketing, LGEIL, said the company was "assessingthe price reductions, category by category but has not taken a decision on the price cuts". He added:"There has been a steady rise in input costs and that could be a reason for manufacturers to hold theprices for now."

LG is expected to announce its final decision in 2-3 days. Most of LG's products are manufactured inunits located in excise free zones, so there would be almost negligible impact of reduction in exciseduty.

Other players in the segment such as Western Electronics, too, hinted at price reductions. "We will

definitely look for an opportunity where we can pass on the benefit to consumers. We are working on itand consider it to be positive," Western Appliances Sunil Shetty said.

"We are working out a way to pass on the benefits to the consumer as fast as possible. We are prettysure that these initiatives will stimulate demand," said Haier Appliances India Director Sales andMarketing R T Rajan.

Samsung, however, is undecided. R Zutshi, Deputy MD, Samsung India, told Business Standard, that"the move comes as a relief for the industry which was facing an input price rise in the first half of theyear and later the rupee depreciation had hit the industry hard too. We are working out the full impactof the reduction and would be taking a decision soon on prices. How much could be pased on to thecustomers is yet to be decided."

13. Banking:

The increased financial support will also be given to cooperative banks and regional rural banks.

The government is also expected to offer cheap loans to labour-intensive export sectors includingtextiles, leather, handicrafts, marine products and gems and jewellery.

The government has also increased the interest assistance given to the public banks by 1% for short-term crop loan up to Rs 30,000. The move is taken to push banks to enhance their lending to farmers."We have now been informed by the Union Ministry of Finance that the government has approvedinterest subvention of 3 percent, instead of 2 percent, for the year 2008-09," stated RBI in a notice.

However the banks will lend to the farmers at the earlier level of 7% per annum. So it means that thefarmer will continue to get the loan at the earlier rate of 7% but the government will give the bank a3% interest on loans extended in order to soak up the extra cost of funds.

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14. Impact on the stock markets:

The RBIs rate cut and the governments stimulus package did have a positive impact on the stockmarkets. Foloowing the news of the stimulus package the benchmark index, the Sensex, had surgednearly 724 points and registered a growth of about 8 per cent over the previous weeks close. Whetherthis rally will sustain over the coming weeks remains to be seen, but the measures did manage to liftthe mood temporarily.

15. The RBI in action:

Moves taken by both RBI and Government have been initiated to gear up the economy from a painfulslowdown

RBI is likely to declare yet another cut in its key policy rates such as repo rate and CRR. The regulatoris also expected to cut the reverse repo rate as pushed by the Planning Commission Deputy Chairman,Montek Singh Ahluwalia. The reverse repo window sucks excess liquidity from the banks. Currently itstands at 6% and it is felt that a reduction in the same is necessary to discourage banks to park theirexcess funds with RBI.

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The fiscal measures by government complement the steps taken by RBI that aim towards a southmovement of lending rates and enhanced credit to the SME and real estate sector.

The monetary measures are "supplemented by fiscal measures designed to stimulate the economy. Inrecognition of the need for a fiscal stimulus the government had consciously allowed the fiscal deficitto expand beyond the originally targeted level," added the statement.

SHORTFALLS OF STIMULUS PACKAGE I

ACROSS the world, countercyclical fiscal policy is back in fashion. It has been only too evident thatmonetary and financial measures to save banks and other financial institutions, however necessary theymay be, are simply not enough to prevent real economies from sliding into recession. Already thelargest economic groupings the United States and the Eurozone have officially declared that theyhave been in recession for some time now. The growth slowdown has affected other countries quite

sharply, including those such as China that were earlier hoped to have decoupled from the West. Theslowing down or even decline of economic activity has had an immediate impact on employment, withsignificant job losses being reported from almost all economies.

So the case for aggressive fiscal expansion for economic recovery has not been stronger for quite sometime. Some governments are responding. President-elect Barack Obama has promised a huge fiscalpackage in the U.S.; China has announced a large fiscal package driven by substantial increases inpublic expenditure, which is already being implemented.

On December 7, the Central government did finally announce a fiscal package to complement theprevious monetary policy measures. Given the context, the need is for bold measures, which could also

then be used to redirect economic strategy in a way that would benefit ordinary people. But thepackage that has been announced fulfils neither of these goals.

Indeed, given all of this, it has been a bit of a mystery why the Central government has taken so long toannounce a much-needed and much-awaited fiscal stimulus. Until a few weeks ago, the Prime Ministerand the Finance Minister even tried to avoid the issue by declaring that they had anticipated the globaldownturn by including a large fiscal deficit in the annual Budget, when in fact that was no more thanthe result of some pre-election sops offered out of political exigency. All this led some people tosuspect that no new fiscal package would be forthcoming, despite the obvious need for it. While this ispatently absurd, from both economic and political perspectives, it is not impossible given theabsurdities that the straitjacket of neoliberal economic thinking can generate.

The case for a strong fiscal stimulus in India has also been evident for some months now, as theadverse impact of the global economic slowdown combines with domestic forces that had alreadydepressed mass demand. It is estimated that more than a million jobs have already been lost in thesmall exporting units and in the construction sector, and other non-agricultural employment is notgrowing. Meanwhile, the agrarian crisis is worsening as cultivators are hit by the fall in the prices ofcash crops.

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When the economic conditions clearly call for bold and definitive measures and when the politicalsituation is also one in which aggressive state action should be expected, why do we get such a half-hearted and unconvincing package? Is it that the Central government itself is not fully convinced of theneed for clear Keynesian measures?

Or has it fooled itself into believing its own hype that the economic crisis is not so severe and will

not deteriorate further? Whatever be the reasons, it is clear that this inadequate package is not enoughto prevent the downturn and cause further unnecessary suffering to millions of Indians.

1. Credit crunch:

The impact of the current economic crisis has been most evident in the financial sector and, thus far,that is what the government has focused on. Attempts to ease the credit crunch included measures toinfuse more liquidity into the system by reducing the Cash Reserve Ratio and the Statutory LiquidityRatio. The Reserve Bank of India also sought to reduce interest rates by bringing down repo andreverse repo rates, and to provide some relief to non-bank financial institutions, particularly insurance

companies. These confidence-building measures were necessary not only because of the ripple effectsof the global financial crisis, but also because the Indian banking system had several of the fragilitiesthat undermined the U.S. banks, albeit in a less severe form.

2. Liquidity trap

In a situation of liquidity trap, monetary measures prove to be lacking, and until now this is what hashappened in the Indian economy as well. Banks are willing to lend only to the most credit-worthypotential borrowers, but such borrowers are unwilling to borrow because of the prevailing uncertaintiesand the expectation of a slowdown. Meanwhile, all other enterprises, even those that desperatelyrequire working capital to stay afloat, find it increasingly difficult to access bank credit even as theyface more stringent demand conditions.

In such a situation, reducing interest rates does not solve the basic problem of tightened creditprovision, although it may marginally reduce costs for those who are able to access bank credit. In anycase, some of the measures seemed to be more designed to drive up the stock market than to revive thereal economy, underlining the governments unfortunate obsession with stock market indicatorsrelative to real economic problems.

Indian banks needed liquidity inflow to jumpstart the economy. That is what we were made to believe.The Reserve Bank of India moved in swiftly. Through a series of measures, including a cut in repo rate,opening a special lending facility for the banks, and cutting cash reserve ratio, RBI has pumpedRs.300,000 crores into the banking system since mid-September. And look what happened. The banksare putting the money back with the RBI as safe deposits. Between 1 and 8 December - in just eightdays alone - banks have deposited Rs.327,000 crores back with RBI at a nominal interest of 6 per cent,which was further lowered to 5 per cent.

3. Promised fiscal expansion:

The promised fiscal expansion is a small one only up to Rs.20,000 crore of direct additional spendingthrough the Planning Commission in unspecified areas. This is less than 4 per cent of the governmentsprojected expenditure for the year, and only around 0.5 per cent of gross domestic product (GDP).

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Such a tiny fiscal input is simply too small to be really countercyclical. It is not even enough to changethe expectations of private agents to get them to start investing and spending more.

4. CENVAT:

The direct spending is combined with a tax cut measure on domestic duties the ad valorem Cenvat

(Central value added tax) rate is to be reduced by 4 percentage points. This will have an impact interms of supporting economic activity only if producers respond by cutting prices and such price cutsgenerate demand responses. But neither is inevitable. For example, the recent cut in the price ofaviation fuel was not passed on to consumers by the airline companies, and even now only one carrierhas promised to reduce the aviation fuel surcharge. So that particular measure simply became anadditional subsidy to shore up profits of airline companies.

It is not clear whether the Cenvat reduction will meet the same fate, reducing government revenueswithout generating more economic activity. But already some companies have declared that theycannot be expected to pass on these tax cuts when their own accounts are still in the red. It is wellknown that in times of economic uncertainty, tax cuts are much less effective in stimulating activity

than direct government expenditure.

5. Housing:

The measures directed towards housing, combined with the encouragement of retail credit expansionby the banks to keep middle-class consumption high, suggest that the government has not really learntany lessons from the current crisis. It is important to expand the Indira Awas Yojana that provideshousing for those below the poverty line, but the money for it is supposed to come out of theRs.20,000-crore package rather than being additional to it. Meanwhile, once again the financial systemis being pushed towards supplying retail credit in the form of housing and personal loans in an attemptto reply the same bubble that is now coming unstuck. This is an illogical way to proceed if the desire isto put the economy on a sustainable growth path rather than subject to boom-and-bust episodes.

6. Infrastructure Investment:

The aim of reviving infrastructure investment has been addressed by promising to allow the public-sector India Infrastructure Finance Company to float Rs.10,000 crore worth of tax-free bonds andleverage the money to borrow further in order to provide finance to those private participants in thepublic private partnership (PPP) projects who have developed cold feet. This may or may not work but in any case the effects will be felt only after some time, and certainly will not be as fast as directpublic investment would have been. This indirect route reflects the urge of the Central government tokeep such expenditure off-Budget, in a flimsy attempt to dress up its own accounts even though theneed for expansionary fiscal stance is obvious.

7. Export Sector:

The other measures are really rather modest in scope and niggardly in content. The only substantialmeasure directed to highly employment-intensive units in exporting sectors such as textiles, garmentsand leather is a small reduction in the interest rate on export credit. In addition, there are some smalltax concessions and a tiny (Rs.350 crore) addition to export-incentive schemes. These are hardly likelyto counteract the effect of big losses of export orders as the major markets start shrinking. What was

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required was a more serious and systematic attempt to allow these industries to keep producing attechnologically efficient levels and shift demand to other markets.

Some of the proposed measures make very little sense for example, the elimination of export duty oniron ore fines and reduction of export tax on iron ore. There is really no reason why India should wantto incentivise the export of iron ore rather than encourage the domestic processing of it into steel.

However, the real problem with this fiscal stimulus package is not so much what it contains but what itleaves out. Clearly, small is not beautiful in this case, and the overall size of the package is too small tohave much an effect. Additionally, some of the most critical areas of public spending have beenneglected, especially State governments.

8. Tax Revenues:

State governments have already started feeling the resource constraint as their tax revenues are affectedby the economic downturn. They are responsible for most of the public services that directly affect thepeople, such as those relating to agriculture and rural development, health, sanitation and education.Yet there is nothing proposed to alleviate the fiscal crunch of State governments, which face a hard

budget constraint. The overall living conditions of the citizenry are likely to be affected. The Centrecould so easily have announced some measures to provide fiscal relief to the States to help them copewith the adverse effects of the downturn. Such measures could include reducing interest rates,providing more Central funds and, most of all, relaxing fiscal responsibility norms that areinappropriate for the current situation and which the Centre itself has already discarded.

9. Food Crisis:

Similarly, the food crisis has been forgotten in all the excitement about the financial crisis. Foodinsecurity remains widespread and may even be spreading, given the significant rise in prices over thepast two years. While overall inflation has been easing, food inflation in India continues despite largefood grain stocks. And the real incomes of workers and cash-crop cultivators have not kept pace withthis. Poor or inadequate nutrition is already a big problem, which will deteriorate as the downturnworsens.

This is a time to allocate much more money on expanding, universalizing and improving thefunctioning of the Public Distribution System. This would at least partly alleviate the problems of thosewho are already at the margins of survival as well as those who could be tipped over into poverty bythe recent economic processes. And there is a major need to address the financial problems ofcultivators, who produce food and other essential agricultural items. Yet, there is no mention of anysuch attempts in the package.

10. PSU Banks:

The going may get tough for the state run PSU banks with the government remaining silent onproviding interest subsidy even as it stressed that they should reduce interest rates to 7.5 percent ofhousing loans of up to Rs 20 lakh. Bankers said that the move is neither feasible not desirable. APSU bank CEO pointed out that the average cost of deposits is around 9.5 percent at present. The costof deposit is much higher than the lending rates and this is a recipe for disaster. An interest subsidy ofat least 2.5 percent is required in a bid to offset the financial damage. Banks may have to reducedeposit rates drastically to be in sync with such low lending rates. The move to reduce interest rates for

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loans up to Rs 30 Lakh, though, is expected to provide the much required fillip to the real estate sectorbut has left the bankers a worried lot.

11. Excise Cut:

The 4 percent excise duty cut is estimated to cost the Government Rs. 8700 crore by way of foregone

revenues.

RBI rate cuts unlikely to stem slowdown. The overall impact of the monetary and fiscal measuresannounced by India over the weekend is 'positive' but marginal. The recent policy steps were likely tobe insufficient to quickly reverse slumping growth in investment and exports.

BAILOUT PACKAGES BY THE INDIAN

GOVERNMENT

1. The bailout for Air India:

The civil aviation ministry has moved a draft Cabinet note proposing a bailout package worth Rs 2,500crore for National Aviation Company of India (NACIL), which runs Air India. The final package islikely to be put in place by January after views of all ministries concerned are taken into account.

NACIL has been asking the government to provide financial help to meet its working capitalrequirement and expansion plans. The company had to bear an additional burden of Rs 2,310 crore onaccount of high jet fuel price during April to October.

We have moved the Cabinet for providing soft loan and equity infusion to Air India. By January isshould be finalised, a top ministry official said, without quantifying the financial package.

The domestic aviation sector has been bleeding on account of high jet fuel prices and is one of theworst affected sectors from the downturn in the economy. It lost nearly Rs 4,000 crore during 2007-08and the accumulated loss is expected to double in the current fiscal.

Air traffic growth during November fell 22% to 3.04 million. Most of the air carriers operated flightswith nearly 40% seats empty. As per industry estimate, airlines break-even at over 70% occupancy ofthe aircraft.

Air India, the countrys largest airline by market share, operates about 150 aircraft in the domestic and

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international market. The airline recently pulled out its service from various commercially unviablesectors to reduce cost. It expects to save Rs 1,200 crore by rationalising operation and optimising itsresources.

The airline shares almost half of the total industry losses. While it recently cleared dues of about Rs1,000 crore to oil marketing companies, it still owes a whopping Rs 739.5 crore to Airport Authority of

India.

2. Export Sector Bailout:

Exporters who have purchased export credit protection are set to get an additional dole-out from thegovernment over and above the cover they have already bought.The government is expected to come out with a Rs 350-crore additional package for exporters soon.This will be in addition to Rs 5,000-crore refinance package announced earlier in the month by theReserve Bankof India for Exim Bank to provide liquidity support to troubled exporters. The funds willbe used to provide export credit insurance cover to exporters over and above the protection provided byExport Credit Guarantee Corporation, ECGC executive director S Prabhakaran said at a CII seminar.

Mr Prabhakaran said: Exporters who have ECGC cover will get an additional 10% of moneydepending on the type of cover. It will cover those entities who are covered by the MSMED (MicroSmall and Medium Enterprises Development) Act. While the details of the package are still beingworked out, the non-SME beneficiaries from the package are likely to be from sectors like textiles,gems and jewelry and leather. The list is expected to cover the list of beneficiaries in detail, MrPrabhakaran added.

One of the fall-outs of the global financial markets in most western markets since September this yearis that many Indian exporters saw a dip in demand and had to cancel order. For the first time in severalyears, the countrys exports saw an absolute dip in exports this year. Many even faced payment andcredit problems, leading them to enforce their claims with the credit insurer. Many have also beenfacing problems because of a volatile rupee.

Mr Prabhakaran said the Corporation has seen the size of claims going up, but added it wascomfortable resource wise and will not increase the premium. We are having a comfortable claim topremium ratio. Mr Prabhakaran said ECGC is not shunning new entrants wanting to cover.

Instead, it is encouraging to go in for turnover-based policies instead of transaction-based policies andensure that exporters go for a long-term protection rather than going for selective cover. But unlike inIndia many commercial entities like COFACE have already indicated their unwillingness to take onexposures in countries like UK, USA , Ireland, Iceland and Italy.

3. The Textile Industry Bailout:

Government announced revival package to bail out textile industry reeling under world economicmeltdown. The Union government has allocated some Rs1,400 crore to clear a backlog in itsTechnology Upgradation Fund Scheme (Tufs), aimed at modernizing textile machinery.

Through the scheme, the government reimburses 5% of the interest on bank loans.

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The $52 billion (Rs2.5 trillion) industry has been impacted on slowing global consumption and cashflow problems at home. Small and medium enterprises comprise 80% of the sector.

The subsidy scheme, meant for pre- and post-shipment credit, ended on 1 October. The latest packagehas, however, restored it by half the original rate at 2%.As a direct fallout of lower production and cancelled export orders, the textile industrythat employs

some 35 million, the largest after agriculturehas hugely laid off temporary workers. Citi estimatessuch job losses number between 700,000 and 500,000.

The retrenchment figure, said Citi director general D.K Nair, has been calculated on lower outputforecasts for the year. Production is likely to fall by 5% this year, he said.

CURRENT POLITICAL SITUATION

Winter can get gloomy in Delhi fog and clouds block out the sun, people are sapped of energy andthe mood turns less than cheerful. This kind of a winter has the Indian economy in its grip.

Policymaking is clouded, inertia is more visible than action on the ground and the mood is far darkerthan it ought to be. But there is a way out. And that is politics.

The Opposition led by the CPM has warned the government to stop hot pursuit of crony capitalismwhich means that the number of billionaires in the country was rising and announce a comprehensiveeconomic package.

While the BJP has accused the dream team of Manmohan Singh and Montek Singh Ahluwalia ofturning the economy into a nightmare.

The UPA has been blamed to be following the wrong strategy of focusing on business houses rather

than the common man.

In todays strained circumstances, there is tremendous pressure on elected governments to dosomething; more so when we have elections looming ahead.

So it might be too much to expect Indian policy makers to take a leaf out of the books of countries likeGermany and Poland (whose prime minister bravely declared he has no intention to spend his way outof trouble).

The fiscal stimulus is expected to control the economic slump to some extent. In effect, the guidingprinciple appears to be to appease different lobby groups keeping an eye on the forthcoming elections.

The government should have reconsidered its decision to implement the second part of the Sixth PayCommission Arrears to its employees (except the Defence Forces). Babus and bureaucrats dontrequire hefty pay hikes in times of approaching recession.

After the resignation of the Home Minister Mr. Shivraj Patil in December, P. Chitambram wasappointed as the new cabinet Home Minister. But the move to leave the finance ministry virtually inauto-pilot mode was very rash. Although there wont be a Budget next February (since the nation is

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Today, NRIs are fearful about their savings. NRIs are looking for a safe haven for the savings. Today,they cannot be paid more than Libor plus 75 basis points for their deposits - this at a time when themost creditworthy entities abroad are not able to get even short-term funds at Libor plus 400.

Apart from other advantages, he said such a step would ease the pressure on the rupee and helpstabilise the exchange rate.

8. P-notes are being abused and should be discontinued.9. Naked short selling must be outlawed, and short selling in itself must be regulated and madecompletely transparent.10. Forex reserves should be used to finance and expedite infrastructure development. India must setup a sovereign wealth fund, which is professionally and competently managed, to invest these reserveseffectively.For four years, the Government has gone on debating what to do with foreign exchange reserves. A

good proportion of them have been parked in US Treasury Bonds11. Banks should be enabled to go in for rights issues to infuse liquidity and make them morecompetitive.

12. The Indian debt market should be opened further to calm the FIIs. Regulations should be altered toenable them to invest in and hold government and corporate bonds, thereby providing a safe asset aswell as reasonable returns.

For the country, by helping dampen the pressures on FIIs to withdraw funds, it will help stabilise theexchange rate.

13. The FICCI has asked the government to create growth packages for various sector of the economyespecially those hit by shrinking demand at home and abroad. The 15% year-on-year fall in in exciseduty collections in November mirrors poor industrial output. Factory output contracted by 0.4percentage point year-on-year in October, driven largely by reduction in manufacturing growth.

14. The Airlines want a uniform tax rate of 4% to be levied on aviation fuel across all states of India.

15. Banks want the government to rethink its move of putting pressure on them to reduce interest ratesto an unacceptable range of 7.5% to 8.5 percent. They are urgently demanding a 2.5% rate subsidy.

16. Textile Sector

Indias textile sector is high on hopes of getting financial bailout from the second stimulus package.The sector, which has seen a sharp decline of 30% in its expected export target at Rs 25,000 crore forthe current fiscal, wants an interest subvention of 4% from the existing 2%, amongst others.

Says Amit Goyal, president, Confederation of Indian Apparel Exporters (CIAe), We have requested theministry to grant a moratorium period of three years before the textile players start paying their intereston loans taken from banks to meet their financial needs.

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If the flexibility of granting a pause before the interest payment is not granted, the fraternity willdefault on their payments. He further said, We have also demanded duty drawback rates to be increasedfrom the current 8.5% to 14.5% and certain income tax benefits so that the sector s financial healthimproves.

In addition to the interest subventions and tax benefits, textile minister, Shankar Sinh Vaghela has also

asked the ministry for a Rs 2,600-crore package to help handloom cooperatives. The package includesa waiver of loans for handloom cooperatives and loans at concessional interest rate of 7%. It may berecalled that the sector, which is labour intensive, did not have much financial relief in the stimuluspackage for the economy announced by the government on December 7.

The government had announced a bailout package of Rs 1,400 crore and an interest subvention of 2%till March 2009 which had upset the players. Meanwhile, Vineet Nigam, a senior analyst at ratingagency ICRA says, High inflation rate and slow industrial growth have been undermining the actualpotential of the textile sector. If tax benefits are not granted by the government, there will be a furtherdip in exports.

17. Stimulus to hike deficit by 200 basis points:

The government's stimulus package will increase the fiscal deficit by 2 percentage point as aproportion to the GDP, said the finance ministry's chief economic advisor, Arvind Virmani. The reviewitself notes that the first six months of the current financial year had seen the deficit reach 77% of thebudgeted amount for the year against just 53.8% in the same period last year.

Government data separately released shows that by October end the fiscal deficit was 87.8% of thefull-year target. Apart from the stimulus package, the implementation of the sixth pay commission andfarm loan waiver scheme - which were not provisioned for in the budget in February - have also led toa widening of the fiscal deficit. In fact, if off-budget items like oil bonds and fertilizer subsidy areadded to total government expenditure, the effective fiscal deficit is likely to cross 7% of GDP.

Virmani pointed out that "the decline in crude oil prices will create more fiscal space". On the pricefront, he said inflation was very much under control and would come down to acceptable levels ofbelow 5% by March end. The review said there was now scope for easing monetary policy after thetight money policy in the first half of the fiscal and added : "An aggressive monetary policy may benecessary if global economic depression continues to adversely affect manufacturing."

18. A stimulus package for farmers:

With 60 per cent of India's population directly engaged in agriculture, and another 200 million landlessworkers indirectly banking on farming, the real stimulus to the economy can come only if the focusshifts to agriculture.

Buried under the whole array of angry reactions following the Mumbai terror attacks is yet another andperhaps more violent disaster. A terribly shocking and startling news - that should have shaken up thecountry's screaming elite - has instead not even been perceived by the electronic media as worthy ofbeing covered even fleeting in the usual 'breaking' news. That 16,632 farmers had committed suicide in2007, with Maharashtra topping the list, has been simply brushed aside.

The reason is obvious. They did not belong to the Taj-is-my-second-home class.

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While the serial death dance in the countryside continues unabated, with an estimated 182,936 farmers- as per the National Crime Records Bureau (NCRB) - taking the fatal route since 1997 to escape thehumiliation that comes along with growing indebtedness, the government is on a bailout spree. SinceSeptember, the government has provided a fiscal stimulus of Rs.5000 billion by way of liquidity andother budgetary provisions. Another stimulus package is awaited, on top of this.

Exporters, for instance, have twice received a stimulus package. First when the rupee/dollar exchangerate had slumped to 37, the textile and garment exporters had pitched for higher support. Thegovernment had moved in swiftly pumping in over Rs.1400-crore. Now when the exchange rate is 50,the industry has again managed a second dose.Not to be left behind, Indian cotton ginners and exporters are also demanding a bailout. They want thegovernment to bridge the difference between a higher minimum support price for cotton, and the worldprices. Citing a 95 per cent drop in exports, the industry is demanding a rescue package. When theMSP was low and the international prices were higher, the same industry never asked the governmentto compensate the cotton farmers!

Amidst all the doom and gloom, the only sector that has emerged unscathed to a large extent isagriculture. Whether India was shining or sinking, agriculture truly remained the mainstay of theeconomy. Complete apathy and neglect of the farm sector drove farmers to commit suicide, and also toquit farming. Facilitating the demise of agriculture are the government policies that are now forciblyenforcing land acquisition, and bringing in polices for corporate takeover.

A bailout package for agriculture doesn't mean a bailout package for the tractor industry or the foodprocessing industry.

With 60 per cent of India's population directly engaged in agriculture, and another 200 million landlessworkers indirectly banking on farming, the real stimulus to the economy can come only if the focusshifts to agriculture. When I say agriculture, I don't mean a bailout package for the tractor industry orthe food processing industry. This would be counter-productive. Nor would it be cost effective.

What is urgently needed is a radical shift by stimulating the farm sector. This is a sure recipe forrevitalising the economy. First, the package should be for regenerating agriculture, providing sops fororganic farming systems that can restore soil health. The Rs.1.20 lakh crores fertiliser subsidy shouldbe given directly to farmers so that they can make an informed choice of shifting to natural farmingsystems. And finally, the package should focus on farmers' welfare. A fixed monthly income based onthe principle of direct income support is what the beleaguered farming community needs.

In addition, the National Rural Employment Guarantee Act 2005 (NREGA), which guarantees aminimum 100 days employment every year to rural workers and promises a moderate minimum wageper day, should have the upper cap of 100 days immediately removed. Rural workers need to be givenemployment for 365 days, like all of us in the organised sector. This in turn will generate demand thatis expected to kick-start the economy. At the same time, there is an urgent need to link NREGA withagriculture. This is the recipe for all around growth. And not only limited to those who consider theMumbai Taj to be the national icon.

19. Fall in Exports:

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For the first time in seven years, export growth fell 12.1 per cent year-on-year for the second quarter,according to data released by the Central Statistical Organisation in November. The textile industry,which accounts for 17 per cent of India's exports and employs 88 million people, is showing the strain.India's textile producers are likely to generate $20.5 billion in revenue this year, way below NewDelhi's target of $30.5 billion.

Within the stimulus package is a nearly $1.5 billion credit window for smaller businesses, to behandled by the Small Industries Development Bank [Get Quote] of India [Get Quote], and a nearly $1billion refinance option that will be handed out by the National Housing Board. To boost consumerspending in sectors such as autos, cement, and textiles, the government will lower the tax on allproducts, excluding petroleum, by 4 per cent.

20. Second stimulus package needed to boost IIP:

Industrial production will continue to fall if the government did not give another second stimuluspackage to prop up stressed sectors, especially manufacturing.

"On the other hand, Indias export outlook is dismal. Outbound shipments declined in October, but theworst is yet to be seen. Losing support from external orders, India will unlikely see a rebound inmanufacturing output any time soon," she warned.

Added Tushar Poddar, an economist with Goldman Sachs: "Although we were expecting industrialproduction to be low, we did not anticipate a negative print for October. We, therefore, expect overallactivity to be sharply lower in the second half of financial year 2009, after growing by 7.8 percent inthe first half."

India's industrial growth fell 0.4 percent in October, compared to a growth of 12.2 percent in thecorresponding month last year, according to data released by the Central Statistical Organisation (CSO)Friday.

The index of industrial production (IIP), a measure of industrial activity in the economy, slipped intothe negative zone mainly because of the manufacturing sector growth falling to 1.2 percent in Octoberfrom 13.8 percent a year earlier.

"Given the present situation, the early announcement of the second stimulus package as mentioned bythe commerce and industry minister will help in restoring the buoyancy in the industrial production,"FICCI said in a statement.

21. Weak fiscal and monetary stimuli:

Now that there has been a reversal in the RBI's tight monetary policy stance and the governmentannouncing a fiscal stimulus package, FICCI said it hoped this leads to improved growth.

"Despite a global market turmoil, Indias central bank continued to tighten monetary policy until Julyand the loosening cycle did not commence until October. Hence, the moderation in domestic demand isa result of the tight monetary policy settings in the first nine months," said Sherman Chan, economistwith Moody's Economy.Com.

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"The aggressive monetary easing since October may not have led to an immediate rebound in domesticconsumption. As such, manufacturing orders from the domestic sector likely remained modest inNovember and December," Chan added.

"The fiscal and monetary stimuli are good, but they aren't enough for the economy to revive," says AdiGodrej [Get Quote], chairman of Godrej Group, a Mumbai consumer products company. He expects a

"fresh dose" of stimulus by early January. "It's the right time as inflation is low," he adds. Inflationtoday is at 8.4 per cent, down from 12 per cent in October.

22. Other Issues:

Under withering criticism for its handling of the country's economic slowdown and Mumbai's terroristattacks, the Indian government fought back by announcing a coordinated, two-flanked stimulus plan

that could top $8 billion. India's moribund stock market momentarily cheered, rising almost 4 per centby midday (Monday). But it then deflated, closing up just 1.5 per cent, on a day when other Asianmarkets soared on optimism about economic recovery plans in the US and China.

The estimate for GDP growth remains below consensus at 6.7 percent year-on-year for FY09 withfurther downside risks, and 5.8 percent for FY10. We continue to expect the Reserve Bank of India(RBI) to ease both the repo and reverse repo rates by 150 and 100 bp respectively by end-March 2009.

Sajjan Jindal, president of the Associated Chambers of Commerce and Industry (ASSOCHAM), saidthat the reversal in IIP figures are unlikely and stressed sectors like manufacturing real estate, steel,cement, textiles, leather and automotive components, would have to be given a bigger booster doses bygovernment.

It is in view of this, the ASSOCHAM reiterates its demand that another stimulus package of Rs.700billion (Rs.70,000 crore) is urgently called for to provide relief to Indian Inc, including a reduction ofanother 200 basis points in CRR," he said.Assocham has also sought that the statutory liquidity ratio (SLR) that banks are required to maintain isreduced from 24 percent to 20 percent to help companies access liquidity.Now is the time to immediately release the second stimulus package. To bring the Keynesianmultiplier in full effect a third stimulus package must be planned from now and released in midJanuary 2009 to return the economy to a sustainable growth rate above 7 percent, said Amit Mitra,secretary general of the Federation of Indian Industry (FICCI).

The second stimulus package, Nath said, would be aimed at generating employment and ensuring thatthe credit needs of the companies are met.

In the next package, the Minister said, "We will look at engineering sector, greater re-finance facilityfor exporters and textile and agriculture sectors."

The second stimulus package assumes significance as the World Bank in its report yesterday expressedfears of a deeper and prolonged slowdown which may pull down the global economic growth to lessthan one per cent in 2009.

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Many of the developed nations like the US, Japan and some countries in the Eurozone are already inrecession and India is witnessing the ripple effects of the slowdown.

The government also dropped gas and diesel prices, already subsidised by the state, by 6 per cent and10 per cent on Friday. "The weekend packages, coupled with increased public spending in the runup to

the elections, could act as an antidote," especially for small and midsize enterprises, says RohiniMalkani, an economist at Citigroup in Mumbai.

With elections looming, and the Finance Ministry under Prime Minister Singh's direct supervision, it isunclear what the government can do next. Until now, not much has helped ease the impact of the globalslowdown, which is likely to shave as much as two percentage points off India's expected 9 per centgrowth in GDP for 2008. Consumption in the second quarter of this fiscal year was 5.5 per cent, a four-year low.

Any new announcements will probably be delayed till mid-January, when the Prime Minister convenesa conference on economic affairs in New Delhi. By then, government policymakers will have heard

from both industry lobbyists and the stock market, and Singh might be feeling more forceful after asurprisingly strong showing by his Congress Party in local and state elections that ended Monday.

As the business community's less-than-enthusiastic reaction to the package sank in, New Delhi soughtto reassure investors that the government of Prime Minister Manmohan Singh is not finished. Moremeasures are on the way, Kamal Nath, the Minister for Commerce & Industry, told a group of reportersoutside his New Delhi office. "There is Step One, then there is Step Two, and then there is Step Three,"he said.

But with India already facing sizable budget deficits, significant inflation, and a continuing liquiditycrisis, it is unclear what more the government can do, especially if it wants to hold on to its creditratings.

"Frankly, this is the most that India can afford," says Aninda Mitra, a sovereign credits analyst atMoody's in Singapore. He estimates the cost of this package to be 0.8% of India's gross domesticproduct, which brings the country's budget deficit close to 10 per cent of GDP, if one includes allgovernment borrowings and not just those of the central government. "This is a country with very largegovernment debt," says Mitra. "You can't start to expect China-style packages."

India's stimulus package, released in two steps over the weekend, pales in comparison with China'srecently announced $568 billion infrastructure projects, or the multifaceted public works program thatPresident-elect Barack Obama has promised for the US.

Nonetheless, it is the country's first solid expenditure plan since the start of the global crisis. Until now,New Delhi has largely cut interest rates and tinkered with bank cash reserve ratios and purchase-repurchase rates; those moves increased the amount of cash available in the banking system by about$60 billion.

Meanwhile, the spigots of already-scarce credit continued to tighten, hitting small and midsizeenterprises hardest. With no formalized credit scores, and banking relations that depend on proximityand familiarity, many family-owned companies complained that their growth plans were comingundone.

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The government on 2nd January 2009 announced the second and final instalment of its fiscal stimuluspackage. Complementing monetary easing by the Reserve Bankof India (RBI), the Centre enhancedthe spending power of states with specific measures to boost credit availability.

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The latest measures, which come in less than a month after the first package was unveiled onDecember 7, are aimed at benefiting housing, NBFCs that lend to infrastructure and financecommercial vehicles.It offered additional sops to exporters and the small-scale sector, besides raisingthe level of protection for cement and steel sectors a tad. It has also incentivised purchase ofcommercial vehicles.

1. CREDIT AVAILABILITY

Credit availability has been hiked in a variety of ways, the interest ceiling on external commercialborrowings has been removed; the cap on foreign institutional investments in the domestic corporatedebt market has been jacked up two-and-a-half times from $6 billion to $15 billion; a special purposevehicle 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 oftax-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.

2. HOUSING SECTOR:

To boost the housing sector, the Centre will work with states to encourage them to release land for low-income and middle-income housing schemes. The general lowering of interest rates would allow homeloan rates to come down as well.

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

The government sets credittargets for the banks it owns. These targets are being revised upward to ensure flow of credit toindustry. The government would also closely monitor, on a fortnightly basis, the provision of sectoralcredit by these banks.

3. EXPORT SECTOR:

The measures for the export sector, which has been hit the most by the recession in developedeconomies, include an extension to the Duty Entitlement Passbook Scheme up to December 31, 2009.Besides, duty drawback benefits on certain items, including knitted fabrics, bicycles, agricultural handtools and specified categories of yarn, have been enhanced.

These changes will take effect retrospectively from September 1, 2008. Exim Bank has obtained a lineof credit of Rs 5000 crore from RBI and will provide pre-shipment and post-shipment credit, in rupeesor dollars, to Indian exporters at competitive rates. Merchandise exports, which constitute 15% of thecountrys GDP, declined by 10% in October and November 2008.

4. INFRASTRUCTURE SECTOR:

To ensure that infrastructure projects are not starved offunds, the government allowed IIFCL to raise

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additional Rs 30,000 crore by way of tax-free bonds, giving it a larger pool of funds to refinance long-term loans to the sector. This will enable the specialist infrastructure lender to fund additional projectsof about Rs 75,000 crore at competitive rates over the next 18 months.

5. STEEL & CEMENT SECTORS:

To provide protection to steel and cement sectors, which have been hit by the slowing demand, thegovernment has brought back countervailing duty on TMT bars and structurals and cement at the rateof 4%. Besides, cement will attract additional customs duty of 4% and TMT bars and structurals at therate of 10%.

These duties were removed to provide relief against inflation which has been on a downslide anddeclined to 6.38%, in the week ended December 20, 2008. The government has also reimposedcustoms duty on zinc and ferro alloys at the rate of 5%.

6. AUTOMOBILE SECTOR:

The package includes measures for the automobile sector which is reeling under a demand slowdown.To boost purchase of vehicles, the centre will provide assistance to states for purchase of buses for theirurban transport systems under the Jawaharlal Nehru Urban Renewable Mission till June 30 this year.Besides, accelerated depreciation of 50% will be provided for commercial vehicles on or after January,2009 and up to March 31,2009.

7. RELIEF FOR STATES:

States facing constraints in financing expenditure because of slower revenue growth have been allowedto raise additional market borrowings of 0.5% of their Gross State Domestic Product (GSDP),amounting to Rs 30,000 crore for capital expenditure in the current financial year.

Moreover, the government will closely monitor its spending to expedite the pace of expenditure for allschemes and programmes. It will set up a fast track monitoring committee to ensure expeditiousapproval and implementation of central projects and has advised state chief ministers to do the same.

8. MICRO-ENTERPRISES SECTOR:

In order to enhance flow of credit to micro-enterprises, the government had increased the guaranteecover extended by Credit Guarantee Fund Trust to 85% for credit facility up to Rs 5 lakh. This willbenefit about 84% of the total number of accounts accorded guarantee cover.

9. NON-BANK FINANCE COMPANIES:

In a bid to ease cash woes of NBFCs lending to the infrastructure sector, the government has allowed itto access ECB from multilateral or bilateral financial institutions with a prior approval from RBI.

Besides, PSUbanks will provide a line of credit to NBFCs financing commercial vehicles. A SPV willbe designated shortly to provide cash support against investment grade paper to these entities.

The scale of liquidity potentially available through this window is Rs 25,000 crore.

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11. COMMERCIAL VEHICLES SECTOR:

The government's special fiscal package fortruckand bus makers will create a demand pick-up butultimately, consumer interest will be driven by ground-level revival of business, say truck and busmakers. "There are three elements of the package," said Pawan Goenka, COO-automotive division,

M&M. First public banks will offer a special line of credit to NBFCs for truck and bus financing which

will "ease the credit crunch and make it easier to buy a new vehicle".

Second commercial vehicles bought from January 1 to March 31 will be able to claim 50%accelerated depreciation which will "act as a big price discount".

And lastly states will be offered help under the JNNURM to buy buses for their urban transportsystems "unlocking a block order.

Together with the excise incentives and repo and reverse repo rate cuts in December, this addresses

most of the demands of the commercial vehicle industry," Mr Goenka added. Dittoed Dilip Chenoy,director general, Society of Indian Automobile Manufacturers: "The funding of the purchase of busesunder JNNURM would help increase capacity utilisation." That's crucial at a time when plantshutdowns and temp layoffs are becoming routine.

12. CUT IN KEY POLICY RATES:

The Reserve Bank of India on 2nd January 2009 cut key policy rates. The repo and the reserve repo rateunder the liquidity adjustment facility (LAF) has been cut by 100 basis points while cash reserve ratio(CRR) has been reduced by 50bps.

Following this move, reverse repo stands at 4%, repo stands at 5.5% and CRR now stands at 5%. Thecut in CRR will infuse Rs 20,000 crore in the system.

The market had widely expected RBI to cut the key lending rates. The cut in repo and reserve repo iswith immediate effect while CRR cut will be effective from fortnight beginning January 17. SinceAugust RBI cut CRR by 450 basis.

Repo rate is the rate at which banks borrow from RBI while the reverse repo is the rate which RBIgives banks forparking their surplus funds. These two rates are seen as the floor and the cap for dailycall money movement.

Both reductions are effective immediately. The repo rate has been cut aggressively since mid-Octoberlast year as the central bank tried to minimise the knock-on effects of the global financial crisis.

13. JNNURM:

Second commercial vehicles bought from January 1 to March 31 will be able to claim 50% accelerateddepreciation which will "act as a big price discount". And lastly states will be offered help under theJNNURM to buy buses for their urban transport systems "unlocking a block order.

SHORTFALLS OF STIMULUS PACKAGE II

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Certain sectors of the economy found their hopes smashed as the stimulus package ignored their manywoes.

1. The revenue loss for the government due to stimulus measures announced so far is estimated at Rs

40,000, finance secretary Arun Ramanathan said on Friday. The government announced measures toboost faltering economic growth on Friday and the central bank slashed its main policy rates to promoteexpansion

2. Exporters, who had high expectations from the government, said they were disappointed. TheFederation of Indian Export Organisations (FIEO) said exporters are not happy with the steps. "We findno serious consideration (of exporters' demands) except extension of the DEPB scheme," FIEOPresident A Sakthivel said.

3. ASSOCHAM said the package is "in the right direction but falls short of expectations".ASSOCHAM Secretary General D S Rawat said the chamber expected a relief of Rs 1,00,000 crore.

4. Commercial Vehicles Sector: Tata Motors, the largest truck and bus maker in India which recorded a51% drop in sales in December and a 70% drop in its medium and heavy range, has also welcomed thefiscal package, but with a rider. "The government needs to work on ensuring that ultimately liquidityreaches customers at reasonable costs," said Tata Motors MD Ravi Kant. "Although some stepsdeclared on Friday would help commercial vehicles, the government needs to take many moremeasures to substantially stoke demand which has gone into reverse gear. We will continue to expectmore positive measures forthcoming from the government," Mr Kant added.

5. As far as the tourism sector is concerned, union minister of tourism, Ambika Soni had recentlywritten to the prime minister, seeking certain relief measures including luxury tax rebate for thetourism and hospitality sector.

However, the stimulus package has not considered any measures that will boost the sector. The traveland tourism industry, which was reeling under the global economic downturn, has suffered a big blowafter the Mumbai terror attacks.

6. The IT Industry: The proposal to expand the Software Technology Parks of India (STPI) scheme thatgrants a ten-year income-tax holiday under Section 10A of the Income-Tax Act to IT and ITeScompanies was discussed by the apex committee set up by the government which was finalising themodalities of a second stimulus package but no benefits were given in the second installment of thestimulus injection.

The STPI is still valid till March 2010 but the industry is however, still very hopeful that thegovernment will eventually take the step which will help a great deal in these troubled times.

7. The IT hardware (desktop, laptops, printers etc) has been witnessing a downturn due to the highinterest rates for sometime. The cut in reverse repo rate and repo rate which will lead to easing oflending rates is expected to boost demand to some extent yet none of its effects have been seen till nowin the share markets nor on in the international trade.

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8. Rural Sector: This package should have been more coordinated and (needed) direct intervention bythe Centre and the state to step up investment in the rural sector. The 0.5% increase in the borrowingwould just be at best adequate to meet the fall in the tax revenue. This wont result in a high (increase)in the expenditure of the state governments.

9. Ceiling on rates for external borrowings: According to Pronab Sen, economist and chief statistician

of India, there has to be a greater emphasis on interventions to remove the bottlenecks in the system.Sen also questioned the move to withdraw ceilings on the rates for external borrowings, saying that itwould bring in riskier capital into the economy. Im not quite sure it solves anything, he said.

10. Forcingbanks to artificially lower interest rates is just as foolhardy. Loans to projects that areviable only at low interest rates run the risk of becoming unviable when rates increase (as they will,when the government is forced to borrow more to finance its present spending) and are nothing but anopen invitation to repeat past mistakes.

11. Restructuring loans in hard times is normal commercial practice. But there is a thin line dividingrestructuring based on the commercial judgment of banks and restructuring driven by political

interference. The latter puts the health of the banking sector on the line. And as the on-going crisis hasshown, governments that mess around with the health of their banking sector do so at their peril.

12. Sectoral re-finance from the Reserve Bank of India (RBI) for small industries, housing, exports,etc., might seem a costless way of getting money to needy sectors. But refinance is nothing butmonetization ofdebt. This can have disastrous consequences once the economy gets back on its track.

13. The easy availability of trade credit is a key turning point in economic rebound. The freezing oftrade credit has left a negative residue in the system. Unfreezing of trade credit would be an importantbenchmark.

14. The Exporters were hoping for an export development fund and also as far as procedural issues onrefund because refunds has been a critical issue for exporters, they are saying they are happy that acommittee is being set up and whether or not that will actually speed things up or fast track them as thegovernment hopes, is clearly not enough.

15. Banks are unwilling to lend to even profitable firms. The central focus of the stimulus packageshould have been to break that risk perception.

FUTURE PROSPECTS

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Alas, that boom was based on unsustainably huge trade deficits, unsustainably high borrowing by UShouseholds and corporations, and unsustainable speculation that drove up the prices of houses, stocksand commodities. Experts warned for at least two years that this unsustainable binge would end oneday, and it did. That is the nature of the business cycle.

When will Indias economy recover? India is now deeply integrated with the global economy, and will

revive only when the world economy does. In a globalised world, no single country can boom inisolation.

This was proved dramatically by France in the 1980-82 recession. President Mitterand did his levelbest to boost France at a time when the rest of Europe and the US were in deep recession. But all hisstimulus efforts failed. France was too closely integrated with the world economy to boom when otherswere sinking.

The same holds true of India today. The government package is a palliative, not a cure. It will mitigatethe pain until the global recovery begins. That will happen when fear is replaced by optimism, whenmarkets unfreeze , when lenders begin lending and buyers begin buying the world over. That same

global tide of optimism will wash into the Indian economy too.

What can trigger such global optimism? Nobody knows. But the slump began in the US housingmarket, so the recovery may start there too. One day, Americans will decide that house prices havefallen too far, and suddenly home buying will pick up. Once optimism replaces fear in the housingmarket , it could do so in the stock market, commodity markets, and the real economy. But i doubt thiswill happen till mid-2009 , maybe later. The immediate future is grim.

Widely varying forecasts for the next financial year, 2009-10 have been made by three leadingeconomists, Arvind Virmani, chief economic advisor of the government; Raghuram Rajan, economicadvisor to the prime minister; and Rajiv Kumar, head of the Indian Council for Research onInternational Economic Relations (ICRIER).

These forecasts can be dubbed the good, the bad and the ugly. I would opt for the second of these. Isuspect the times ahead will be bad, rather than good or really ugly. Virmani, an incorrigible optimist,sees good days ahead. He thinks that after decelerating to maybe 7.5% this fiscal year, growth willrebound strongly to 8.5% in 2009-10.

Rajan, however, believes that bad days are ahead. He predicts a dip to between 5% and

indian government stimulus

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