India Govt. announces measures to boost economic growth

In the latest package, the second announced in less than a month, the government, which faces elections by May this year, said it has removed "all-in-cost" ceilings on External Commercial Borrowing or ECB, besides measures to facilitate access to funds for the housing sector that includes the "development of integrated townships" to be permitted as an eligible end-use of the ECB.

To boost infrastructure spending, the government has authorized India Infrastructure Finance Company Limited (IIFCL) to raise Rs.10,000 crore to refinance bank lending for infrastructure projects. IIFCL has also been authorized to access in tranches an additional Rs.30,000 crore by way of tax-free bonds once funds raised in the current year are effectively utilized.

It also said that non-banking financial companies (NBFCs), dealing exclusively with infrastructure financing, would be permitted to raise money through ECB. These measures would be reviewed after June 30, it added.

To facilitate cash inflow, the government said the investment limit on foreign institutional investors' (FIIs) investment limit in rupee denominated corporate bonds in India has been nearly tripled from $6 billion to $15 billion.

The government also upwardly revised the credit targets of public sector banks and said it will closely monitor on a fortnightly basis, the provision of credit to different sectors by these banks.

The government also said it was preparing to recapitalize state-run banks to the tune of Rs.20,000 crore ($4.1 billion).

This would take place over the next two years to ensure the banking system does not suffer from capital adequacy constraints, it said.

The government has also allowed different states to raise in the current financial year, additional market borrowings of 0.5 percent of their Gross State Domestic Product, totaling about Rs.30,000 crore to meet additional expenditure and fund infrastructure projects.

It also announced several measures to support recession-hit exporters including restoration of duty-entitlement passbook (DEPB) rates to those prevailing prior to November 2008 to account for the loss due to currency value changes and enhancement of duty drawback benefits on certain items with retrospective effect from September 1, 2008.

EXIM Bank, which has obtained from RBI a line of credit of Rs.5000 crore, will also provide pre-shipment and post-shipment credit, in rupees or dollars, to Indian exporters at competitive rates, the government said.

To boost steel and cement sectors, the government has brought back countervailing duty on TMT bars and structural cement. These duties were exempted to contain inflation.

Full exemption from basic customs duty on zinc and ferro alloys, which was also provided to contain inflation, is also being withdrawn, the government said.

To boost the housing sector, the government said it would work with state governments to encourage them to release land for low income and middle-income housing schemes.

Looking forward, the government said it "does not envisage any further measures in the current fiscal year."

However, it added that it "is aware that the measures required to provide an economic stimulus to the economy have to extend beyond the current financial year."

"The measures announced so far are adequate enough to achieve 7 percent growth" in the year ending March, Montek Singh Ahluwalia, the deputy chairman of the panel, which draws up economic roadmaps, told reporters in New Delhi after he announced the stimulus package. "The measures that the government has taken will ensure that we still have good growth in the country."

"These measures will make the new year happier. The key is if the ministries can implement and spend what they have been allocated, it would be more than enough to stimulate growth," Ahluwalia said.

"We have to keep in mind the need for contra-cyclical fiscal policy and monetary policy will continue into the next financial year also," he said.

Ahluwalia, however, warned against expecting any immediate economic turnaround. "We should expect, from all the global projections, that the next year is going to be a very difficult year for the global economy. It is impossible to insulate yourself completely from a major downturn in the world economy," he said.

In December last year, government had announced a Rs.20,000 crore ($4 billion) economic stimulus package that included an across-the-board cut of 4 percent in ad-valorem Cenvat rate except for petroleum products to steer India's economic growth to high trajectory.

It also received the Parliament's nod for additional Rs.25,000 crore ($5 billion) spending, most of which would go towards food and fertilizer subsidies on top of spending for rural jobs, roads, housing and a textile industry hit by easing exports.

According to market analysts, the second economic stimulus package is clearly aimed at boosting consumer spending and corporate investment though it lacks the punch due to subsidies, a farm loan waiver scheme and a salary hike for civil servants announced earlier this year.

"It is well-targeted and will help to stimulate growth. Downside risks of growth could be prevented and the step will provide some relief," said D.K. Joshi, principal economist at ratings agency CRISIL.

"Allowing global investors to access corporate credit in India by increasing investment limit (in rupee-denominated corporate bonds) from $6 billion to $15 billion, that's very positive," said Sandesh Kirkire, CEO of Kotak Mahindra Asset Management.

"It will give a breathing space to the whole productive sector, especially construction and infrastructure sectors," said N.R. Bhanumurthy, economist at the Institute of Economic Growth.