New Delhi: India will announce a fiscal package on or before Saturday to increase the amount of money in the financial system (or liquidity); encourage banks to lend more to companies in the housing and automotive businesses and people buying cars and houses; and bail out exporters who have been hit hard by the global economic slowdown, said a senior government official who did not want to be identified.
The government’s focus on these sectors has been prompted by the fact that growth in the automotive and housing businesses will have a so-called multiplier effect on the rest of the economy, while protecting exporters would help mitigate growing problem of unemployment, particularly of semi-skilled workers in sectors such as textiles.
A committee of secretaries headed by cabinet secretary K.M. Chandrasekhar and representatives from key ministries such as finance and commerce met in Delhi on Wednesday to work out the contours of the economic stimulus package that the government hopes will check the current slowdown in growth.
The total value of the package for exports, across sectors such as handicrafts, gems and jewellery might come to about Rs2,000 crore and would include, among others, refund of service taxes already paid by exporters, said the official.
The Reserve Bank of India (RBI) is set to announce liquidity boosting monetary measures which might also include a cut in the policy rate, said the official. The monetary measures would include extending credit lines for housing and auto sectors, while the fiscal measure would include Rs15,000 crore in budgetary support for infrastructure.
Indian overnight indexed swaps fell to fresh four-and-a-half year lows on Wednesday on expectations the central bank may resort to a sharp monetary easing to boost sentiment and prop up flagging growth, dealers said. “Swap rates fell following some media reports that said RBI may cut rates to the tune of 150-200 basis points, when the market was betting on a 50-100 basis points cut,” said Anoop Verma, a dealer with Development Credit Bank. A basis point is one-hundredth of a percentage point.
The government is also considering relaxing the cap on the rate at which companies can borrow money abroad. Companies currently cannot borrow at a rate that is 450 basis points more than Libor, or the rate at which most banks dealing in eurodollars charge each other for large loans.
The official, however, said relaxing the ceiling might not help Indian companies much because raising money from overseas has become tough in the wake of the financial crisis.
The respective ministries are expected to fine-tune this plan over the next few days, the official said.
The automobile and real estate sectors were among those hardest hit by the global financial crisis, while some infrastructure firms reported difficulties in raising debt for projects.
Amit Mitra, the president of industry lobby Federation of Indian Chambers of Commerce and Industry (Ficci) said the need of the hour was a comprehensive package aimed at both macro-level changes such as reducing interest rates as well as a stimulus package for exporters and for small and medium enterprises to increase employment opportunities.
“The proposed special fund for infrastructure projects will increase the fiscal deficit to that extent. But I think it may prove to be useful,” said M. Govinda Rao, director of the National Institute of Public Finance and Policy.
Rahul Chandran, K.P. Narayana Kumar, Sangeeta Singh and Reuters contributed to this story.