In a desperate move to shield India from ongoing global recession and to provide lubricants for accelerating the sluggish growth speed, the government along with the Reserve Bank of India Friday evening unveiled the second stimulus package, providing aid to several sectors.
Within one month of announcing first stimulus package with additional expenditure of Rs.20,000 crore to provide adequate liquidity in the system on Dec 07 last year, the planning commission of India on Friday (Jan 02) introduced its second and last stimulus package for this fiscal year, government official said.
This second relief package has been designed to abet glooming export and export oriented industries such as handicraft, gems & jewellery, steel, cement, housing and textiles. Besides these, some special measures have been taken off to boost the corporate bond markets, reality sectors and automobile industries.
This fresh aid package has been announced after the RBIs declaration of revising key lending rates to inject additional Rs.20,000 crore in the system. This fresh announcement of RBI has come 25 days ahead of its decided schedule of fourth quarter credit review on January 27, 2009.
To cushion the economic system, the apex bank has cut the Cash Reserve Ratio (CRR) – the slice of cash banks park with the Central bank- by 50 basis point (bps) from 5.5% to 5%, Repo Rate- the rate on which the Master Bank lends to the bank- by 100 bps from 6.5% to 5.5% and Reverse Repo Rate - the rate on which the Central Bank takes back money from commercial banks in exchange of government securities - by same 1 percent from 5% to 4%.
The slashing in CRR will alone infuse Rs.20,000 in the market while the chopping in repo rate will motivate the banks to disburse the short term loans. A cut in reverse repo rate will discourage the banks to lend RBI. All these moves of the RBI will collectively work to boost the plunging industries and reality sector.
The series of announcement by RBI and planning commission seems to work out in the favour of worsening Indian economy, which is dipping from previous 9% to currently at 7 to 8% due to partial effects of global meltdown.
To protect the country from further effect of global financial crisis, the government has announced a series of stimulus package. ‘The measures that the government has taken will ensure that we still have good growth in the country,’ said Montek Singh Ahluwalia, the Vice-President of Planning Commission while announcing the second stimulus package. ‘‘We should expect, from all the global projections, that the next year is going to be a very difficult year for the global economy. 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 added.
While commenting upon current economic structure of India, RBI said in a statement, ‘the fundamentals of our economy continue to be strong. Once the crisis is behind us, and calm and confidence are restored in the global markets, economic activity in India would recover sharply.’ But RBI has also warned the effect of global meltdown by adding, ‘but a period of painful adjustment is inevitable.’
Highlights of Second Stimulus Package:
o To relieve gloomy exporters that have been affected worst from global recession and financial crunch, the planning commission has extended the Duty-Entitlement Passbook (DEPB) scheme and enhanced duty drawback benefits on items like knitted fabrics, bicycles, farm hand tools and some categories of yarn.
o For reviving corporate bond market, commission has hiked the Foreign Institutional Investment (FII) limit in rupee-denominated securities from $6 billion to $15 billion, more than two and half times. Moreover, the interest ceiling on external commercial borrowings has been removed.
o A Special Purpose Vehicle (SPV) has been made of worth Rs.25,000-crore to provide liquidity support to eligible and credit worthy non-banking finance companies.
o To boost the much needed infrastructure sector, government has allowed to India Infrastructure Finance Company to raise another Rs 30,000 crore in the forms of tax-free bonds.
o To revitalize the housing sector, the Central government has asked the states to release land for low-income and middle-income housing schemes while RBI has already deducted the key prime lending rate (PLR) – the basic rate at which banks determine the long term rate like home and automobile loans.
o For the states, the central government has allowed to borrow an additional Rs 30,000 crore from the market to meet the need of enhanced spending. Moreover, Centre has also announced to aid states for purchasing of buses for their urban transport systems under the Jawaharlal Nehru Urban Renewable Mission till June 30, 2009.
o For automobile industries, Centre has accelerated depreciation of 50% for new commercial vehicles by March 31,2009; this move of centre can boost the purchasing of new automobile vehicles which has also been hit worst due to higher rate of interest and skyrocketing manufacturing cost.
o To assist the state owned banks and to boost the lending through PSUs banks, Centre has announced to grant an additional capital of Rs.20,000 crore in the next two years.
o To protect the indolent steel and cement sector, the government has restored countervailing duty on TMT bars and structurals, and cement at the rate of 4% with additional customs duty of 4% on cement, 4 % on TMT bars and 10% on structurals.
o In a bid to augment flow of credit to micro-enterprises, the government has hiked the guarantee cover extended by Credit Guarantee Fund Trust to 85% for credit facility up to Rs 5 lakh. This move of government will benefit to nearly 84% of the total number of accounts pertaining guarantee cover.
o The RBI will provide a credit line of Rs 5,000 crore to EXIM Bank to provide pre-shipment and post-shipment credit, in rupees or dollars, to Indian exporters at competitive rates.
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