Govt To Spend Rs 20K Cr More; Home Loan Package Coming

Excise cut 4% across the board to boost demand

New Delhi: Faced with a somnolent economy that's not responding enthusiastically to monetary measures such as interest rate cuts, new finance minister (and Prime Minister) Manmohan Singh on Sunday took the twin route of fiscal incentives and government spending to stimulate growth.
    He has identified two important levers that might spur the economy back on the growth path. First, and perhaps the most important, is keeping comsumption levels in the economy high, even if that requires the government spending from
its own pocket. The second is related to the first: Ensuring that employment levels do not fall, not only to ensure continuing consumption but also because growing unemployment is suicidal when elections are just a few months away.
    With these two broad-brush objectives in mind, Planning Commission deputy chairman and trusted man of the PM, Montek Singh Ahluwalia unveiled a stimulus package for the economy with an acrossthe-board 4% cut in excise duties and a Rs 20,000-crore increase in plan expenditure as the centerpieces. Other measures included interest rate cuts on loans for infrastructure and exports, while a separate package for home loans has been promised soon. There are also measures which are aimed at providing exporters and the really small scale units some breathing space. Looking at the breadth, scope and impact of the measures announced, it can be assumed that if Manmohan Singh had a middle name, it would probably be Keynes.
    Will the blanket cut bring down prices and encourage consumers to start shopping again, which in turn would create demand for industry? Ahluwalia expressed the hope that manufacturers would use the opportunity provided by the excise duty cut to reduce prices. However, initial reactions from industry indicated that not all of them are planning to pass on the benefit to consumers. Car prices to fall, but consumer goods may not
    The governments booster dose drew a mixed response on Sunday. The effectiveness of the 4% excise duty cut across the board will depend on whether the industry passes on the benefits to the customers or not and that remains to be seen. While auto manufacturers, already suffering a dip in demand, said they would pass on the entire benefit to customers, makers of consumer durables and non-durables were not very inclined to do so right away. Instead, they wanted to use the excise benefit to offset earlier costs. Planning commission deputy chairman Montek Singh Ahluwalia has already sent a signal, saying during the slowdown period, manufacturers should pass on the benefit by lowering prices to boost demand. P 19 Revenue loss not a worry, says Centre
    The excise cut would also impact imported goods, since the countervailing duty applicable to them would come down by the same amount. The 4% cut is estimated to cost the government Rs 8,700 crore by way of foregone revenues. If demand rise, the revenue loss would be smaller since what the government would lose by way of cutting duty it would make up through larger volumes.
    Ahluwalia said the government was not worried about the revenue loss or about the fiscal deficit. He admitted that the stimulus package would lead to widening of the fiscal deficit, but said the main aim of the government at present was to arrest the slowdown.
    Announcing the intention to increase plan expenditure by Rs 20,000 crore, Ahluwalia pointed out that with this, the government would be spending Rs 300,000 crore under plan and non-plan expenditure in the next four months of the current fiscal. This includes Rs 280,000 crore, provided in the budget but not spent so far.
    The government also decided to allow Indian Infrastructure Finance Company Limited (IIFCL) to raise Rs 10,000 crore in tax-free bonds. This will enable it to raise funds at a lower interest rate. IIFCL will use the funds to refinance low-interest bank lending to infrastructure projects under public-private partnership (PPP).
    The lower rates, Ahluwalia said, would improve the viability of projects.

Dr M's
Booster Dose For
Economy
Measure | Across the board excise duty cut of 4%
Impact | Prices of most manufactured goods to fall. Expect cheaper cars, bikes; consumer durables like washing machines, ACs; nondurables like soaps, eatables; commodities like steel, cement
Measure | Additional plan spend of Rs 20,000cr this fiscal Impact | Expected to stimulate demand and boost economy
Measure | India Infrastructure Finance Company Ltd allowed to raise Rs 10,000 crore through tax-free bonds for lending to highway projects Impact | Leg up for infrastructure projects; estimated that this would support public-pvt partnership projects worth Rs 1 lakh cr in highways
Measure | RBI to provide Rs 4,000crore refinance facility to National Housing Bank for lending to housing finance companies at low rate
Impact | Cheaper home loans; expected to stimulate demand for houses
Measure | Govt to bear two percentage points of interest costs in loans taken by export units Impact | Indian exporters, hit by global slump, to become more competitive
Measure | Govt departments allowed to replace their vehicles in current fiscal Impact | Sale of cars to rise
Measure | More relief for micro and small units, apart from RBI pumping in Rs 7,000 crore into SIDBI Impact | Micro and small units, which employ millions, may stay afloat. Govt doesn't want these units to shut down in an election year