India Announces New Economic Stimulus Package
The Congress led Indian Government on Friday announced its second emergency monetary and fiscal stimulus package in just under a month, in an effort to support its previously fast growing economy in the face of a global economic slowdown, and counter a sharp fall in global demand.
The Indian Government is rather limited in the options it has available to it since a large proportion of its budget is deficit spending and this therefore limits the amounts of funds it has available to put toward a fiscal stimulus package. Last month it announced a US$ 4 billion or Rs 19,200 crore fiscal stimulus package.
The Reserve Bank of India (RBI), India’s central bank cut official short term interest rates by 100 basis points on Friday, the fourth cut in as many months and the Repo Rate now stands at 5.5 per cent. The RBI also announced it would reduce the Cash Reserve Ratio (CRR) the proportion of deposits that the banks must hold with the central bank on January 17th. The CRR is to be cut by 50 basis points and will now stand at 5 per cent the effect of the cut will be to release Rs 20,000 Crore or US$ 4.2 billion into the banking system.
As part of the stimulus package, the Government also offered to recapitalise state banks with Rs 20,000 crore or US$ 4.2 billion over the next couple of years and also eased regulations for Indian companies in the infrastructure and real estate sectors wishing to borrow internationally. The caps on foreign investment in the corporate bond markets were also lifted.
The action to support the economy came as one of the country’s chief economic planners warned of a tough year ahead.”We should expect, from all the global projections, that the next year is going to be a very difficult year for the global economy,” Montek Singh Ahluwalia, the deputy chairman of the Planning Commission was quoted as saying to the Financial Times.
The Government drew sharp criticism when it announced its first stimulus package last month, much of the criticism was for not doing enough to address the Rupee liquidity crisis, which had effectively stopped banks from lending to their core clients.
Indian industrialists have appealed to the government over the last three months to make deeper cuts to interest rates. Many companies, particularly those in export sectors, have scaled back operations to cut production and face lay-offs.
Ravi Kant, managing director of Tata Motors, said Friday: “The government needs to work to ensure that ultimately liquidity reaches customers at reasonable costs . The government needs to take many more measures to substantially stoke demand as that has gone in a reverse gear.”
The initial Government economic growth target of 9 per cent for the current fiscal year has been revised downwards to 7.5 per cent after achieving the initial target for the past three consecutive years. The RBI believes that the economy driven by domestic consumption will rebound quickly and it is statement on Friday said “a period of painful adjustment is inevitable”. Some investment banks estimate growth India’s GDP will be below 7 per cent this fiscal year.
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