Indian Economy gets a Big Push

Ashok Handoo

The Prime Minister Dr. Manmohan Singh has been at every occasion assuring the people of the country that his Government would resort to all policy measures –fiscal, monetary, exchange rate and public spending - to minimize the effect of global economic meltdown on India and that “no instrument of public policy will be spared”. The former Finance Minister Shri P Chidambaram too had also reassured people on the Government’s determination to act. The present set of fiscal and monetary measures announced by the Government is a part of the same endeavour. First, the policy measures announced by the RBI Governor Shri D. Subbarao. The cut in benchmark lending rate, the repo rate (the interest it charges from banks for lending money) by a clean 1 percent, from 7.5 to 6.5. It also cut the reverse repo rate (the rate at which it borrows cash from banks) again by 1 percent from 6 to 5 percent. A one percentage point cut in repo rate pumps Rs.40,000 crore into the system. This is a clear signal to banks to cut lending rates across the board, particularly to the industry, infrastructure, housing, exporters etc,. This was followed by other measures announced by the Planning Commission Deputy Chairman Shri Montek Singh Ahluwalia in the shape of a stimulus package. These included a 4 percent cut in the excise duty and a Rs. 20,000 crore increase in plan expenditure. The purpose is to stimulate growth by raising demand and keeping the consumption levels in the economy high. A cut in excise rates should bring down the prices of most of the manufactured goods. It will, at the same time reduce Government revenue and widen fiscal deficit, but Shri Ahluwalia made it clear that the Government is not worried on this account as it’s priority is to keep the economy going by keeping the domestic demand high. The 4 percent cut is estimated to cost the Government Rs. 8700 crore by way of foregone revenues but part of it could be redeemed if the demand rises. What the Government looses by duty cut, it would make up through larger volumes. The decision to provide Rs. 4000 crore refinancing facility to the National Housing Bank for lending to housing companies should make available cheaper home loans. Since housing is an activity which involves many manufacturing sectors, this should boost demand in commodities like cement, steel etc,. it will also help keep huge labour force employed in construction work. Bringing bank loans to housing finance firms under the priority sector should also lead to increased supply of home loans. Other measures announced aim at providing succor to exporters and small scale units. The Government has decided to subsidise interest costs of exporters by up to 2 percentage points subject to a minimum rate of 7 percent per annum. The Government will also provide an additional Rs.1100 crore for full refund of terminal excise duty or CST where ever applicable and another Rs.350 crore for export incentives schemes. This should go a long way in arresting the slump in the export market. RBI will also pump in Rs.7000 crore into SIDBI to help micro and small units which employ millions of people. The guarantee cover on loans to lending institutions has also been raised from Rs. 50 lakh to Rs. 1 crore. For the textile sector, one of the country’s largest employers and exporters, an additional allocation of Rs.1400 crore will be made to clear backlogs in the technology upgradation scheme. This will help textile units to upgrade to improve competitiveness. Import duty on Naptha has been abolished to bring down costs in this sector. Government Departments have been allowed to replace vehicles within the budget allocations, in the current financial year. Prices of Aviation Turbine Fuel (ATF) announced earlier, has already brought down air fares and the process is continuing. After all these measures , the two important questions that remain in public mind are whether the prices of goods and services will actually fall and whether loans will actually be available at cheaper rates. As far as the first is concerned some manufacturing companies have announced that they will pass on the benefit of excise cut to the consumers, almost in full measure. In fact some car companies have already effected it. Some companies producing durable consumer products have begun assessing to what extent they can reduce their prices. The former Finance Minister has been trying to persuade the industry all through that they should cut prices rather than production to help the economy to get out of the current crisis. The present fiscal and monetary measures should make them follow this advice more readily. Regarding reduction in lending rates, some private banks have announced a cut in home loans. Other banks are taking a fresh look on their lending rates for various segments and are expected to come out with a response sooner than later. A silver lining has been the consistently falling inflation rate which has now come down to around 8 percent. With the fall in petrol and diesel prices, the general price line is bound to fall further as petrol prices constitute an important ingredient of transport costs. We may thus witness a more comfortable inflation rate much too soon. Industry sector has welcomed the measures though it expects more to defuse the situation. FICCI described the measures as “a good start in the right direction”. Assocham President, S. Jindal hopes that money will flow into the system to support the projects that have been put on hold. The terror strikes will invariably affect the tourism industry which is expecting a 25 percent fall in bookings. This is due to the advisories issued by western nations to their citizens about their visits to India. The Prime Minster who holds the Finance portfolio also, is confident that the country will be able to maintain the growth rate around 8 percent in the current fiscal. The most pessimistic estimates put it at 7 percent. What is important now is that the industry and other sectors of economy respond to government initiatives in full measure and pass on the benefit of price cuts to the consumers. They need to realize that in the current global crisis when international demand is shrinking, it is only the domestic demand that can keep the business going. Fortunately, India with its 1.1 billion population has a huge potential of keeping demand afloat. All they need is the purchasing power which the Government is trying to do by pumping in funds into the system. *Freelance Writer Disclaimer : The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of PIB.