After rate cuts, govt plans $4 bn spending boost

The government said it was also scrapping import duty on naphtha for the power sector and export duty on iron ore fines, letting a state-run infrastructure firm issue tax-free bonds worth 100 billion rupees ($2 billion) and cutting a central valued-added tax rate by four per centage points.

“The overall package is geared towards helping producers, especially the export sector, to tide over the difficult time of the global credit crunch,” said Indranil Pan, chief economist at Kotak Mahindra Bank in Mumbai.

“While tax reductions can be effective immediately, for the overall package to work itself into the economy may take some time.”

Two vehicle makers, Tata Motors and Mahindra & Mahindra, said on Sunday they would pass the value-added tax cut on to customers.

Analysts said the package might help some sectors when share trading opened on Monday, but some were doubtful it would boost the overall market, which has lost 55 per cent this year. The benchmark index closed down 2.9 per cent on Friday.

India had hoped to avoid the worst of the global financial crisis, with demand largely domestically driven and growth an impressive 9 per cent in the fiscal year ended last March.

But high borrowing costs, deteriorating demand abroad and paralysis of its lending markets as the credit crunch spread have taken their toll. Economists now see expansion of 7 per cent this fiscal year and possibly falling below 6 per cent in 2009/10.

SITUATION EVOLVING

The government, which wants healthy growth ahead of national elections due by May, said it would allocate more funds for incentives on exports and provide an extra 14 billion rupees for modernising the textile industry.

Total spending in the final four months of the fiscal year ending in March would be around 3 trillion rupees ($106 billion), including the additional 200 billion rupees it was seeking from parliament.

“The government is keeping a close watch on 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,” a statement said.

It cautioned more fiscal stimulus was likely to be needed in the year starting next April, but Montek Singh Ahluwalia, deputy chairman of the Planning Commission that draws up economic plans, said 7 per cent growth was feasible this year.

“But we cannot be complacent. We want to take action in advance of any problems arising so that factors that would otherwise weaken our growth performance are minimised,” he said.

Sunday’s announcement falls far short of neighbouring China’s $586 billion package unveiled in November.

But with a state and central government fiscal deficit set to top 7 per cent of gross domestic product in 2008/09, economists say India has limited options as far as public spending goes, and tax receipts have slowed in the later part of the year.

Ahluwalia said it was clear the central fiscal deficit would be larger than first budgeted, but did not say by how much.

The government originally projected 2.5 per cent of gross domestic product for this fiscal year, but former finance minister Palaniappan Chidambaram has since said it could be bigger.

The government is already funding a debt waiver for small farmers and a hike in civil servants’ pay, and on Friday announced it would borrow $9 billion between now and late February to help cover the waiver, subsidies and pay hike.