Stimulus package to rely on rate cut
The slight rise in credit to industry by banks in the fortnight ending
December 5, reversing a sustained decline through November, has given
government managers the hope of a revival in the industrial sector.
According to RBI data, non-food credit to industry has turned positive
at Rs 7,560 crore for the fortnight ended December 5 after turning to a
negative of Rs 9 crore in the previous fortnight. The government plans
to announce another stimulus package this week on top of the Rs
1,50,000 crore announced so far through two supplementary budgets in
rapid succession in October and last week. Prime Minister Manmohan
Singh met top finance ministry officials, including the finance
secretary Arun Ramanathan, RBI governor D Subbarao and economist C
Rangarjan on Saturday to discuss the specifics of another package. But
key policy adviser Suresh Tendulkar told FE the headroom for additional
spend was limited. The government will have to walk a tightrope and
will have to tailor the stimulus package according to its fiscal
constraints, he said. Tendulkar is chairman of the PM s Economic
Advisory Council. Total expenditure for the fiscal is already at Rs
9,00,000 crore, which means the fiscal deficit is way above the
government s target of 2.5% of GDP. The government is, therefore,
considering a cut in key interest rates like in reverse repo, the rate
at which banks park their additional funds with RBI. It is currently at
5%. While leading financial entities like HDFC and SBI (SBIN.NS : 1287.45 0)
cut rates by up to 75 basis points, Singh s team expects the rates to
ease even more with more cuts from RBI. As the rate of creation of
money in the financial system has declined to 10.4% in this fiscal
against 11.2% in the same period last year and the inflation rate has
eased below RBI s comfort zone of 7% to 6.84%, there is headroom here
unlike the fiscal space. Industry chambers like the Confederation of
Indian Industries said on Sunday the government should cut both repo
and reverse repo rates by 100 basis points. The fiscal package,
according to the chamber, should include a special refinance window for
the commercial vehicles sector, an increase in the duty drawback rate
and a reduction in interest on the export credit for textile sector. It
sought a deferment of the excise duty payment by sectors under stress
as well as a push to low-cost housing. It has also asked that the
government set up a National Infrastructure Stimulus Fund to facilitate
projects in the sector. To counter the impact of the turmoil in global
financial markets, the government on December 7 had announced the
stimulus package aimed at sectors such as steel, automobile, exports
and textiles. It also announced a 4% cut on central excise duty to spur
demand, and hiked its annual plan spend by Rs 20,000 crore. The Reserve
Bank on its part has already injected around Rs 3,00,000 crore
liquidity into the system through a series of cuts in key policy rates
and other measures. Many banks have followed suit and lowered their
lending rates. With the downturn in the economy, the country s
industrial output slipped by 0.4% in October and is likely to worsen in
November, although official figures are yet to be released. Export data
for last month revealed that the country s total exports declined by
10%. Faced by slackening demand and falling prices, most companies have
asked for further relief measures.
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