Govt. announces Rs.20,000 crore economic stimulus package, India Inc. wants more

A day after the central bank announced a slew of monetary measures to ease tight liquidity conditions in the system and bring down loan rates, the government said it was scrapping import duty on naphtha for the power sector until March 31, 2009 and export duty on iron ore fines while on lumps it will be reduced to 5 percent from 15 percent earlier.

The government also said it would let a state-run infrastructure lender, India Infrastructure Finance Co. Ltd. (IIFCL), issue tax-free bonds worth Rs.10,000 crore ($2 billion) and cut a central valued-added tax (Cenvat) rate by four percentage points on all manufactured products other than petroleum and those where current rate is less than 4 percent. The proposed cut brings down Cenvat on big cars to 20 percent, cement to 10 percent and cotton textile to nil.

The government also promised to allocate more funds for incentives on exports, including fully exempting 18 services rendered to exporters from service tax, and providing interest subsidy of 2 percentage points on bank loans of exporters in textile, leather and jewellery sectors.

The government also agreed to refund excise duties and sales taxes worth Rs.1100 crore to exporters and provide extra Rs.350 crore for export incentive schemes.

Additional export credit guarantee of Rs.350 crore for firms facing difficulty in key markets would be provided, it added.

Additionally, the government said it would provide an extra Rs.1400 crore for modernizing the textile industry, through a technology upgrade funding scheme.

To boost corporate borrowings and real estate sector, the government also promised that banks would be provided guarantee for extending collateral-free loans up to Rs.1 crore to small firms and state-run banks would announce package for borrowers of home loans up to Rs.20 lakhs.

"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," it said in a statement.

The economic stimulus package allows India to join global peers in pumping cash as credit markets freeze though Sunday's announcement falls far short of neighboring China's $586 billion package unveiled in November.

Responding to the government's move, India's industry chambers said the economic stimulus package was good but not enough.

"We were anticipating a package of Rs.70,000 crore. A few sectors such as steel, cement, construction and real estate need boost from the government," said Sajjan Jindal, president of Associated Chambers of Commerce and Industry of India (ASSOCHAM). The industry lobby is expecting another package of around Rs.30,000 crore in January.

"Given the extent of problems that are being faced by the industry, we hope that Sunday's announcement is only part of the total fiscal package and more such measures will be seen in the near future," said Chandrajit Banerjee, director general of Confederation of Indian Industry (CII).

"The package has enough punch to restart the overall economic activity. It also seeks to create additional demand through a cut in Cenvat. It has [also] taken a number of steps to support exports in the face of sagging global demand," said Federation of Indian Chambers of Commerce and Industry (FICCI) secretary general Amit Mitra.

However, all agree that the government's move would steer the economy to high growth track.

"The impetus of the government on infrastructure is good. I think we've always seen for any country to get out of recession a further impetus on infrastructure is good. We are working on those same lines," said Sarang Wadhawan, managing director, Housing Development & Infrastructure Ltd.

India needs $500 billion investment over the 2-3 years on improving its infrastructure including airports, roadways, energy and ports to sustain a 9 percent average annual growth in the economy.

India's economy grew at a robust annual rate of 9 percent or more for the past three years but high borrowing costs, deteriorating demand abroad and paralysis of its lending markets put a brake in the nation's growth pace and global financial groups like Citigroup, JP Morgan, Goldman Sachs, Morgan Stanley and Nomura have lowered their estimates for India's GDP growth over the past one month to 6.5-7.5 percent.

"It is a beginning," said Nasser Munjee, chairman, Development Credit Bank. "If they can raise that amount, it will be a start. More than the infrastructure sector, the government should have had something more for the housing sector. Mass housing, besides everything else, also creates retail demand."

The real estate developers, including DLF and Unitech, said the measures would have a good impact, particularly in the non-metros by way of a demand-boost for houses, but felt that the package for home loans by banks should have been for borrowings up to Rs.50 lakh instead of the prescribed limit of Rs.20 lakh.

"If we consider the extent of the problem of the realty industry then not enough has been done...with this step, the demand for affordable housing may increase, but it is not sufficient," said Sanjay Verma, executive managing director (South Asia) of realty consultant Cushman & Wakefield.

Agrees Pradeep Jain, chairman of Parsvnath Developers. "It's an eyewash. It is not going to spur demand," Jain said.

Meanwhile, already three auto makers, Maruti Suzuki, Tata Motors and Mahindra & Mahindra, said on Sunday they would pass the value-added tax cut on to customers. Other car makers are also expected to pass on the duty cuts to consumers, which would bring prices down by between Rs.8000 and Rs.50,000.

Public sector banks are also expected to announce easier terms for housing, auto and personal loans on Monday.