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Rs 20,000-cr shot to boost demand in economy

In what would seem like a half-hearted move to rev up the domestic economy in the wake of global slowdown...

Written by Enseconomicbureau | New Delhi |
December 7, 2008 3:01:46 am

In what would seem like a half-hearted move to rev up the domestic economy in the wake of global slowdown, the government today said it would spend an additional Rs 20,000 crore in 2008-09 to galvanise rural infrastructure, extend sops worth Rs 1,800 crore to exporters and take a Rs 8,700 crore hit on its tax revenues by cutting the Central value added tax (Cenvat) rate by 4 per cent across the board to make cars, consumer durables and even soft drinks cheaper.

The fiscal measures approved by Prime Minister Manmohan Singh on Sunday came a day after RBI reduced key short-term repo and reverse repo rates by 100 basis points each and signaled to banks that they must cut lending rates to companies and individuals. The weekend’s monetary and fiscal package, however, did not inspire Corporate India, particularly the distressed real estate sector, which clearly expected much more.

Planning Commission Deputy Chairman Montek Singh Ahluwalia told a press conference, “This must be seen as a complement to the RBI’s monetary measures announced yesterday. The attempt is to minimize the impact of the weak global economy on the Indian economy.”

Carmakers Hyundai, Maruti and Tata said they will pass on the benefits of the excise duty cut to buyers. Real estate and housing companies, however, said the Cenvat rate cut on steel and cement may not immediately translate into lower prices for homes.

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The package is clearly intended to boost demand in the economy. Accordingly, the government has authorized India Infrastructure Finance Company Ltd to raise Rs 10,000 crore through tax-free bonds by March-end 2009.

Significantly, the government has dropped the idea of a 2.5 per cent interest subsidy on home loans up to Rs 25 lakh for the time being. Finance Secretary Arun Ramanathan ruled it out, saying an interest rate cut will be a normal consequence of the repo rate cut. He, however, said public sector banks will shortly announce a package for borrowers of home loans in two categories: upto Rs 5 lakh and Rs 5 lakh to Rs 20 lakh.

The quantum of today’s fiscal package, given its direct impact on the Budget, is limited to Rs 32,000 crore — just 0.65 per cent of India’s GDP. Ahluwalia did not put a number to the size of the package and said the idea was to give a boost to the economy and more measures would be taken based on how the situation evolves.

Independent economist Ajay Shah said the government “could have brought down the fiscal deficit substantially in the last four years when the economy was posting robust growth. But now, it risks a downgrade by global credit rating agencies because of a worsening fisc.”

WHAT THE STEPS WILL MEAN

Cheaper home loans: The government has promised public sector banks will announce a package for loans up to Rs 20 lakh. But it has ruled out interest rate subsidies for now. Despite lower steel, cement prices, real estate firms are not keen to drop prices.

CHEAPER VEHICLES: Maruti, Hyundai, Tata have said they will pass on the benefits of 4% Cenvat rate cut to consumers. The Alto will be cheaper by Rs 8,000; bigger cars will see bigger price cuts.

THE ECONOMY: Will mitigate impact of the global slowdown. Domestic GDP will grow at around 7 per cent. Fiscal deficit will be much higher than the 2.5% of GDP estimated in Budget. Inflation will drop to lower single digits. But more steps will be needed to counter “recessionary trends”.

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