India Inc. reacts positively to 2nd economic stimulus measure

On Friday, the government announced a slew of measures including opening the corporate bond market to more foreign investment, easing overseas borrowing rules and promising more capital to state-run banks.

The move comes after the Reserve Bank of India (RBI) slashed two key short-term interest rates (effective immediately) by 100 basis points (bps) each and also lowered its its cash reserve ratio, the proportion of deposits banks must keep with the central bank, by 50 bps (with effect from January 17) on Friday to stimulate a faltering economy.

"The second stimulus package addresses a wide range of concerns and should hopefully give a big boost to the slowing economy," said Amit Mitra, secretary general of Federation of Indian Chambers of Commerce and Industry (FICCI).

According to Mitra, the package was a set of positive measures towards boosting growth and a timely follow-up to the initiatives taken by the government already. "One hopes that following this, business confidence would be restored. It is now important for banks to come out and on lend to corporates rather than invest money in government securities as they have been doing earlier," Mitra said.

"The chamber believes that the authorities will review the impact of these measures and fine-tune policies on a continuous basis. We further hope that these measures would be followed by a series of measures as we go along and as the situation demands," he added.

The real estate and infrastructure sectors have welcomed the stimulus package calling it "a very positive development."

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 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.

"You need to add this one to last time's package. Added together I think now interest rates will fall enough to cause a positive effect. Otherwise, it was just a ripple," said Ravi Ramu, CFO, Purvankara Projects.

"I think now there can be a nice big wave. It puts money more easily in people's pockets so it will stimulate retail business, cars, houses, especially the cheaper houses," he said.

"It's a step in right direction. It will help corporates get funds at a cost which is reasonable. It will bring down the cost of funds considerably," said Vardhan Dharkar, CFO, KEC International.

Agrees Tapash Majumdar, CFO of C&C Construction. "Existing ones' (projects) cost will be cheaper in terms of funding, that is because of rate cuts. And because of cuts in CRR, banks will now have to keep lesser money with RBI and therefore will have much more liquidity available for distribution to borrowers. It will help from both angles – access to funds, and the cost of the funds accessed will be lower," he said.

According to Sunil Malhotra, vice president (finance), Omaxe, the stimulus package is "a very positive development."

"Definitely the doors have been opened. The only fact that needs to be seen is whether funds are available for this sector (real estate) globally," Malhotra said, adding, "It would be difficult no doubt, but at least different options are available."

"It is definitely a positive development. It will help us a lot. If we can raise (ECBs), we will definitely raise it. Funds are still there," said Anil Kumar, CEO, Ansal API.

"It is positive for us. There were projects we were not able to focus on, because we were unsure of the future. Banks were not willing to fund the projects. Now we can go ahead on it," added H.S. Bharana, chairman, Era Infra Engineering.

However, Vinayak Chatterjee, chairman of Feedback Ventures feels that the government's package is insufficient for boosting infrastructure spending. "When one combines the existing infrastructure projects that are suffering on account of interest rates and liquidity as well as a crunch of new projects coming up," the amount authorized to IIFCL to raise is "insufficient," Chatterjee said.

"Secondly, we still don't know the details of how the money raised by IIFCL will actually be meaningful for infrastructure developers in the private sector," he said.

"Finally," Chaterjee added, "the critical aspect is that 80 percent of infrastructure spend is still by the public systems arena, which is public sector or government investments. They have been going through frightfully slow. Unfortunately, this fiscal stimulus package, while I recognize that it can only stimulate the infrastructure sector fiscally, would have welcomed any fresh out-of-the-box thinking on creation of some national-level high-powered committees like FIPB to push the pace of public expenditure."

The cement industry has welcomed the package as the government's move brings some kind of parity between the cement exporter and the local manufacturers in India. 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.

"These are good measures. Interest rates coming down for housing sector in particular, would be helpful for the industry. Similarly, expenditure on infrastructure is definitely a very well move as far as cement goes," said D.D. Rathi, managing director of top cement maker Grasim Industries.

The auto industry also has welcomed the stimulus package, saying the package will stimulate credit to sectors like autos because the lack of confidence amongst the banks have to a large extent had impacted the industry's growth. The government also provision for accelerated depreciation of 50 percent for commercial vehicles to be purchased on or after Jan. 1, 2009 up to March 31, 2009.

"We welcome the positive steps announced in the fiscal package today. The government needs to work on ensuring that ultimately liquidity reaches customers at reasonable costs," said Ravi Kant, managing director, Tata Motors.

"The government needs to take many more measures to substantially stoke demand as that has gone in a reverse gear. We will continue to expect more positive measures forthcoming from the government," he added.

Agrees Sunil Munjal, chairman of world's largest motorcycle maker Hero Honda. "This is something that we have been asking for the industry for a while. The announcement will increase liquidity and secondly it will be a signal to the banks to lower cost of funding," he said.

To boost the recession-hit export sector, the government announced several measures 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.

According to FICCI 's Mitra, the restoration of the duty drawback rates for select sectors and the extension of the DEPB scheme till December 31, 2009, will help improve the competitiveness of exporters.

However, Ajai Sahai, director general of Federation of Indian Export Organizations (FIEO), said the badly hit export sector was having more expectations from the government as far as the DEPB continuances is concerned. "The Commerce Ministry has already clarified that this scheme will continue till the foreign trade policy for 2009 remains in operation. It was only a custom notification which was valid up to March 1 2009, which is now being extended up to December 3," Sahai said.