Indian Government Announces Stimulus Package
The Congress led Central Government announced a Rs 20,000 crore or US$ 4 billion economic stimulus package on Sunday as it bolstered efforts to support an economy whose growth rate is suffering as a result of a global economic slowdown.
The latest spending proposal brings the total amount of new spending promised by the central government to help the ailing real estate, export and infrastructure sectors to Rs 300,000 crore or US$ 60 billion. Business leaders remained unconvinced, though the equity market cheered the news rocketing 400 points at mid day, with profit taking occurring at higher levels. At the time of writing this report, the Sensex was still up 197 points or up 2.2 per cent for the day.
Business leaders feel the Government’s efforts are too modest and are calling for a much more aggressive public spending approach to spare the country from a sharp slowdown. The Financial Times quoted Nasser Munjee, chairman of Development Credit Bank as saying “It is a beginning . . . but nowhere near what needs to be done.” Anjan Roy, economic adviser to the Federation of Indian Chambers of Commerce and Industry echoed the sentiment, saying that “more money was needed to jump-start the economy”.
The Indian Government runs a persistent budget deficit and with the fiscal 08-09 deficit projected at above 8 per cent of GDP, New Delhi has little room to move. The announcement of the latest package followed the Reserve Bank of India’s move to slash key short term official interest rates by 100 basis points to 6.5 per cent. However, business leaders and analysts said the 100 basis point cut to the repo rate and reverse repo rate, used to absorb cash from the market, were insufficient to lift growth and ease lending.
Adi Godrej, the industrialist and chairman of Godrej, a consumer goods group, said the central bank could have cut rates further: “I would have preferred a deeper cut of 150 basis points.”
Since the collapse of Lehman Brothers in September, the central bank has cut short term rates by 250 basis points and injected more than Rs 300,000 crore or US$60 billion of primary liquidity into the market. However, very little of this money has reached struggling companies, forcing many to cut production or close altogether. Car manufacturers Tata Motors and Mahindra & Mahindra have become the latest companies to announce a suspension of production at some plants as demand slows.
Hundreds of small and medium-sized enterprises in the textile sector have had to close as exports soften. India’s total exports year on year fell 12.1 per cent in October which was the first drop in absolute terms in over seven years, according to the RBI. Central Bank governor Duvvuri Subbarao said on Saturday that economic growth was likely to fall below 7 per cent this year, short of its previous forecast.
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