Government announces second round of fiscal stimulus package
By Vaibhav Aggarwal
Jan 6, 2009
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The government on Friday, January 2nd announced the much awaited second round of fiscal stimulus package with a view to encourage the slowing economy.

The package which is second within a month includes measures such as higher public spending, easing liquidity for further lending at lower interest rates, boosting the slumped sale of commercial vehicles and access to easy availability of credit for the export sector, housing and small industries.

Through the announcement of this package, Government seems to mark a clear shift from curtailing of inflation to stimulating of growth in order to lower the impact of recession in the West. Meanwhile the RBI has also slashed its key policy rates again and infused Rs. 20,000 crore into the banking system. Since October 2008, RBI has been reducing its policy rates to boost liquidity and has thereby induced more than Rs. 3,20,000 crore into the banking system.

However there are more measures that help in countering the recession. At the time of announcing the stimulus package, 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 earlier provided to control the price spiral.

Following its move, the government has also asked PSU banks to increase their credit targets for the current fiscal so as to ensure optimal disbursement of credit at lower cost. The fiscal package along with RBI cutting rates is expected to increase the flow of funds to the struggling housing sector. "With reduction in interest rates, housing loans will become affordable. But, the concern is that a proper recovery system needs to be put in place to take care of any apprehension in the minds of lenders over quality of credit," said D D Rathi, CFO of Grasim Industries.

At the same time, JSW Steel director (finance) Seshagiri Rao said, "Such stimulus packages must translate into lower interest rates, which do not seem to be happening. Interest rates need to be brought down to the 2004 levels--around 8-9%."

Further as a part of the second stimulus package, the Cabinet has relaxed the external commercial borrowings (ECB) norms. Both RBI and the Government have decided to remove ‘all-in-cost' ceilings on such borrowing. In order to facilitate access to funds for the housing sector, the ‘development of integrated townships' would be permitted as an eligible end-use of the ECB. The relaxation of ECB norms is a positive step as corporates can access borrowings outside India.

Under this new package, the FII limit in rupee denomination would be increased from USD 6 billion to USD 15 billion. The India Infrastructure Finance Company (IIFCL), will access an additional Rs 300 billion by tax-free bonds in order to finance projects worth Rs 750 billion in the coming 18 months.

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