New Delhi / Mumbai: In a coordinated move, the Union government and the central bank on Friday announced a series of measures aimed at reducing borrowing costs, improving the flow of credit in a slowing economy and helping sectors that have been the worst hit by the current downturn.
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Among the measures to increase liquidity was a cut in the amount of cash that banks have to park with the Reserve Bank of India (RBI), new rules that make it easier for Indian companies to borrow from the global markets, and more than doubling of the limit to which foreign institutional investors can buy domestic corporate bonds every year, to $15 billion (Rs73,350 crore).
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The interest rates at which RBI borrows from and lends to banks for short periods of time have also been cut by a full percentage point, a signal to banks to reduce their own lending rates to companies and consumers.
Other measures unveiled include allowing state governments to increase their borrowing for capital spending by about Rs30,000 crore, special aid to select groups such as exporters and manufacturers of commercial vehicles, and recommendations that state governments release land for low-cost housing.
These measures were announced at the end of a week when new data showed that the Indian economy was in deeper trouble than earlier believed. The government package comes a month after an earlier spending plan announced in early December to support economic growth left Indian industry asking for more.
The stimulus package drew a mixed response from industry groups and economists.
The Confederation of Indian Industry (CII) and the Federation of Indian Chambers of Commerce and Industry (Ficci) welcomed the new package. “This package is timely and will help the next quarter demand considerably. The repo and reverse repo cuts, along with reduction in the cash reserve ratio (CRR), will ease liquidity for banks and have a positive effect on the cost of credit,” CII director Chandrajit Banerjee said.
Ficci secretary general Amit Mitra said: “The steps should hopefully give big boost to the slowing economy,” adding that he expected “business confidence would be restored”. But another chamber—Assocham (Associated Chambers of Commerce and Industry of India)—said it expected more, even as the Federation of Indian Export Organizations said enough had not been done for exporters.
“This package should have been more coordinated and (needed) direct intervention by the Centre and the state to step up investment in the rural sector. The 0.5% increase in the borrowing would just be at best adequate to meet the fall in the tax revenue. This won’t result in a high (increase) in the expenditure of the state governments,” said Thomas Isaac, finance minister of the ruling Left Front government in Kerala.
The bond market quickly reacted to the rate cuts. The yield on the bond dropped to 5.07%, from the previous close of 5.29%. Industry is hoping that its lending costs, too, will drop. But bankers say that they may not rush to cut lending rates at once. Romesh Sobti, managing director and chief executive officer of IndusInd Bank Ltd, said: “The rate cuts are with a desire to make money cheaper. Interest rates are expected to come down further with a lag as banks will first align their deposit rates.”
Bank of Baroda chairman and managing director M.D. Mallya said, “We have lowered our prime lending rate 75 basis points on Thursday, largely in anticipation of RBI measures, but we will assess the situation before taking further steps.” K.C. Chakrabarty, chairman and managing director of Punjab National Bank, also echoed the same view: “We are always ahead of the curve and have already reduced our rates few days back. We cannot take rate cut decision on a daily basis. Our asset-liability committee will examine the situation at the end of the month.”
Chanda Kochhar, joint managing director and chief financial officer of ICICI Bank Ltd, said, “These measures would accelerate the move to a lower interest rate regime across the system. We could expect a bottoming out of government bond rates and further decline in deposit and lending rates from the current levels.”
The government does not have the space to go in for a big-bang spending package because it is hamstrung by a large fiscal deficit already likely to cross the budget estimate and the targets set by the Fiscal Responsibility and Budget Management (FRBM) Act, a federal agreement to limit deficits. This could be one reason why the fiscal package does not have provisions for extra spending by the Union government. The government already estimates that revenue loss in 2008-09 due to the slowdown in the economy and the giveaways, would be Rs40,000 crore.
Yet, M. Govinda Rao, member of the economic advisory council to Prime Minister Manmohan Singh and one of India’s foremost public finance economists, said: “This is not the time to talk deficits. The FRBM is useful when the economy was doing well. The budget itself has hidden a lot of things. What’s the point in saying the emperor is fully clothed now.”
But other economists pointed to certain worries.
According to Pronab Sen, economist and chief statistician of India, there has to be a greater emphasis on interventions to remove the bottlenecks in the system. Sen also questioned the move to withdraw ceilings on the rates for external borrowings, saying that it would bring in riskier capital into the economy. “I’m not quite sure it solves anything,” he said.
The steps announced for the auto sector and commercial vehicles in particular were welcomed by companies making them. Ravi Kant, managing director of Tata Motors Ltd, the country’s largest commercial vehicle maker, said in an emailed statement, “We welcome the positive steps announced in the fiscal package today. The government needs to work on ensuring that ultimately liquidity reaches customers at reasonable costs.”
K.P. Narayana Kumar, Liz Mathew, Teena Jain, Samar Srivastava and Anita Bhoir of Mint, PTI and Reuters contributed to this story.