Government to roll out fiscal stimulus to offset slowdown
By Joseph Samson
Dec 5, 2008
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In a bid to counter economic slowdown in the country, Government and Reserve Bank of India are expected to cut the excise rates for automobiles sector and signal a reduction on lending rates such as home loans, personal and other loans respectively.

The government is likely to announce a major fiscal stimulus package to boost the economic activity in the country. Besides cutting the excise rates for commercial vehicles, the government is also expected to further relax the external commercial borrowing norms which would facilitate exporters and others.

Also the government will announce a budgetary support plan of Rs 15,000 crore and Rs 2,000 crore assistance for exporters who are facing demand slowdown from the sub-prime hit markets like US and UK.

Similarly, RBI is likely to declare yet another cut in its key policy rates such as repo rate and CRR. The regulator is also expected to cut the reverse repo rate as pushed by the Planning Commission Deputy Chairman, Montek Singh Ahluwalia. The reverse repo window sucks excess liquidity from the banks. Currently it stands at 6% and it is felt that a reduction in the same is necessary to discourage banks to park their excess funds with RBI.

The government has also increased the interest assistance given to the public banks by 1% for short-term crop loan up to Rs 30,000. The move is taken to push banks to enhance their lending to farmers. "We have now been informed by the Union Ministry of Finance that the government has approved interest subvention of 3 percent, instead of 2 percent, for the year 2008-09," stated RBI in a notice.

However the banks will lend to the farmers at the earlier level of 7% per annum. So it means that the farmer will continue to get the loan at the earlier rate of 7% but the government will give the bank a 3% interest on loans extended in order to soak up the extra cost of funds.

The increased financial support will also be given to cooperative banks and regional rural banks.

The government is also expected to offer cheap loans to labour-intensive export sectors including textiles, leather, handicrafts, marine products and gems and jewellery.

On December 2nd, Prime Minister Manmohan Singh held a meeting with the apex committee to discuss on measures dealing with the economic slowdown.


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