Ashok Dasgupta

More steps to reverse economic slowdown

NEW DELHI: The government, in tandem with the Reserve Bank of India (RBI), on Friday announced the much-awaited second stimulus package aimed at reversing the economic slowdown through higher public spending, providing additional liquidity for onward lending at lower interest rates, boosting sagging sale of commercial vehicles and making easier credit availability for the export sector, housing and small industries.

The package — the second within a month and last for this fiscal — marks a clear shift from reining in inflation to spurring growth in the grim scenario of a crumbling financial system and recession in the West so as to minimise the slowdown impact, even as the government’s total revenue loss in 2008-09 is officially expected to be Rs. 40,000 crore with a fiscal deficit of about 6 per cent of the GDP (gross domestic product), as per Planning Commission estimates.

While the RBI slashed its key policy rates yet again to inject an additional Rs. 20,000 crore into the banking system, the government has asked the public sector banks (PSBs) to hike their credit targets for the fiscal so as to ensure optimal disbursal of funds at least cost. Inflationary pressures are easing and additional liquidity is being made available to PSBs at cheaper rates.

Since last October, the RBI has pumped over Rs. 3,20,000 crore into the monetary system to usher in a low interest regime, especially when inflation was coming down in the wake of the fall in the prices of fuel, metals and farm commodities.

Unveiling the stimulus package at a press conference here, Planning Commission Deputy Chairman Montek Singh Ahluwalia said: “Other measures designed to counter recessionary trends” include the withdrawal of countervailing duty (CVD) exemptions on imports of certain steel products and cement which were provided earlier to contain the price spiral.

Commenting on the fiscal effect of the measures, Mr. Ahluwalia indicated that the deficit would be over 6 per cent in 2008-09. “You will certainly have a fiscal deficit which will be more than three percentage points of the GDP above what was originally targeted. These are Planning Commission estimates ... Banking system is very critical and PSU banks need to be recapitalised.” The package provides for recapitalising them by Rs. 20,000 crore over the next two years.

The package has provided a reprieve for troubled exporters in the form of higher rates for tax refunds and a commitment that the DEPB scheme would be extended up to December 2009, an official statement said. Specific sectors such as knitted fabrics, bicycles, agricultural hand tools and some categories of yarn would get duty draw backs at enhanced rates.

It also permits States to access the market for borrowing about Rs. 30,000 crore to meet additional expenditure during the year. The government has eased external commercial borrowing (ECB) norms and hiked the FII (foreign institutional investor) investment limit in rupee-denominated instruments to $15 billion from the current ceiling of $6 billion.

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