This past weekend, Indian Prime Minister Manmohan Singh announced various economic measures the Indian government would undertake in an effort to stimulate growth of the domestic economy, which has been adversely affected by the global financial crisis and the recent terrorist attacks in Mumbai. Such measures include additional spending, export subsidies, tax incentives, and support for bank loans and infrastructure financing.
Under the fiscal stimulus plan, the Indian government will seek authorization to spend an additional Rs. 200 billion (approximately $4 billion) in the current year, with plans to spend a total of Rs. 3 trillion (approximately $60 billion) during the remainder of the fiscal year, which ends on March 31, 2009. These fiscal measures are intended to supplement the monetary actions taken by the Reserve Bank of India, the most recent of which were announced this past Saturday, to provide additional liquidity to the banking system, including cutting the Reserve Bank's short-term lending and repo rates by one percentage point, to 6.5%, and its short-term borrowing and reverse repo rates by one percentage point, to 5%.
As part of the stimulus package, exporters of specified labor-intensive goods will be provided a subsidy of two percentage points on interest rates until March, while the government will also make available back-up guarantees and refund a total of Rs. 11 billion in excise and sales taxes to exporters. Additionally, the government plans to cut value-added taxes by four percentage points to 10%, 8% and 4%, for the automotive, cement and textile industries, respectively.
According to the plan, in an effort to encourage bank lending, the Reserve Bank of India will arrange a "refinance facility" for the National Housing Bank, and state-run banks “will shortly announce a package for borrowers of home loans,” with additional measures to be taken “to promote an accelerated growth trajectory.” Furthermore, “to facilitate the flow of credit to medium, small and micro enterprises (MSMEs),” low-interest loans will be made available by the MSMEs either directly or indirectly through other financial institutions. Finally, in order to support the financing of various infrastructure projects, the government has authorized the India Infrastructure Finance Company Limited (IIFCL) to raise Rs. 100 billion (approximately $2 billion) through tax-free bonds by March 31, 2009, though “depending on need, IIFCL will be permitted to raise further resources by issue of such bonds.”
Prime Minister Singh stated that the Indian government is closely monitoring the “evolving economic situation and will not hesitate to take any additional steps that may be needed to counter recessionary trends and maintain the pace of economic activity.”