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Fiscal Stimulus Package

By Abhishek on 6:42 PM

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The government announced FISCAL STIMULUS PACKAGE:

RBI Governor Duvvuri SubbaraoMajor tax cuts across the board to boost demand and allocated additional funds and incentives for exports, housing, textile and infrastructure to stimulate the economy due to global financial crisis.The package, coming on the back of fresh REPO and Reverse REPO cuts announced by the RBI on Saturday, includes a four per cent(4%) cut in ad-valoram duty across the board, to boost additional spending, besides enhanced credit for exporters, along with a Rs 10,000 crore mop up for India Infrastructure Finance Company.Import duty on Naptha for use in power sector as well as export duty on iron ore to be eliminated."In order to provide a contra-cyclical stimulus via plan expenditure, the government has decided to seek authorisation for additional plan expenditure of up to Rs 20,000 crore in the current year," the statement said, adding the total spending programme in the four months ending March was expected to be Rs 300,000 crore.

As part of efforts to boost the housing sector, the public sector banks would shortly announce a package for home loan borrowers in two categories -- up to Rs five lakh and between Rs 5-20 lakh, the statement said, adding that additional measures would be taken, as necessary, to promote an accelerated growth trajectory.Attaching special significance to infrastructure development, the government authorised India Infrastructure Finance Co Ltd (IIFCL) to raise Rs 10,000 crore through tax- free bonds by March 2009 and said it would be permitted to raise further resources. this initiatives would support a PPP (Public-Private Partnership) programme of Rs 100,000 crore in the highways sector,"

Paying special attention to exports, the government decided to provide an interest subvention of two per cent up to March 2009 for pre and post-shipment export credit for labour-intensive exports like textiles, leather, marine products and SME sector. The concession is subject to a minimum rate of interest.Besides, it would provide an additional Rs Rs 1,100 crore for full refund of terminal excise duty/CST and another Rs 350 crore for export incentive schemes and a back-up guarantee of Rs 350 crore to ECGC (Export Credit Guarantee Corporation) for providing guarantee for exports to difficult markets and products.

The government plans to allocate the money, equivalent to 5 percent of gross domestic product, by March, it said in a release in New Delhi today. The Reserve Bank of India yesterday cut interest rates for the third time in less than two months.  India said on Sunday it will seek approval for extra spending worth 200 billion rupees ($4 billion) as part of a plan to boost the economy and help it counter the global slowdown.

The government also announced a series of measures including duty cuts on several products, plans to boost home loan growth and allowing a state-run firm to issue tax free bonds worth 100 billion rupees to fund infrastructure projects.

COMMENTS:

INDRANIL PAN, CHIEF ECONOMIST, KOTAK MAHINDRA BANK, MUMBAI:

"Obviously the monetary policy was not enough to provide a boost to the economy. The reduction in Cenvat will help boost consumption demand.

"The overall package is geared towards helping producers especially the export sector to tide over the difficult time of the global credit crunch.

"While tax reductions can be effective immediately, for the overall package to work itself into the economy may take some time."

``This is huge and it reflects the seriousness of the global economic crisis,'' said Sonal Varma, a Mumbai-based economist at Nomura International Plc in Mumbai.``This also shows there is nothing like decoupling in an integrated world - India is getting affected by both global trade and financial channels.''

The unprecedented spending comes after Mumbai, India's financial capital, came under attack from terrorists last month and as a global credit crisis cuts off access by Indian companies to international funds.

SARANG WADHAWAN, MANAGING DIRECTOR, HDIL :

"What the RBI announced yesterday was good and the government package hasn't got much relevance to commercial real estate. We do feel that the housing loan subsidy towards 2 million rupees budget (houses) works.... I think a direction from the RBI towards banks to start lending, that will actually ease real estate. For us, none of our flats run in the 2 million rupees budget. Unless you're talking of really low income housing it really doesn't provide much...I think commercial real estate needs a lot more impetus.

SHERIAR IRANI, CO-RESEARCH HEAD, JM FINANCIAL :

"On the face of it the amounts don't seem to be very large, especially that for infrastructure. I think it will provide a boost to individual sectors such as textile, gems etc. The market may react in a sector-wise way. I don't see the market reacting as a whole."


Global Impact :
Governments around the world are spending to revive growth. China unveiled a 4 trillion yuan ($582 billion) package in November and President-elect Barack Obama plans to make the ``single largest new investment'' in roads, bridges and public buildings since the 1950s to lift the sagging U.S. economy.

India, where domestic consumption makes up 60 percent of the GDP, is facing the impact of the global recession because its integration with the world economy has been rising.



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