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Benoy Paul Jose.
AN IMPORTANT LESSON IN HISTORY The government of India announced a series of stimulus package to counter recession which was caused by the collapse of Lehmann brothers as a result of the U.S sub prime crisis .This collapse triggered a global liquidity crunch throughout the global financial markets .The indices of global equity markets went in deep bearish trend due to fear of the American economy collapsing due to excess financial leverage and continued financial deregulation. A few economists felt that emerging economies like India and China will remain decoupled from developing economies like U.S and European economies, but that was not the case. Even emerging economies like India and China were affected because of a high dependence of exports to the developed economies. As a first measure to count recession central banks throughout the world had to pump in huge amount of money to maintain adequate liquidity in the system as bank were reluctant to lend fearing default from companies. Developed economies like U.S resorted to protectionist measures which is typical in a recession which has affected countries like India. In India RBI undertook measures like reducing the CRR ratio and reducing the interest rates, to increase the cash liquidity with banks. This would help the banks to lend more. Right now it is too early to judge the effect of the stimulus packages. From what has happened we can see that the excess liquidity has found its way to the equity markets which has increased shares price to dangerous levels. This has resulted in asset bubble in markets like India and china. All the central banks have adopted a wait and watch approach to see how effective the stimulus package is and whether any extra stimulus is needed. All the countries have passed laws for more stringent financial regulations. The global economy has contracted and Countries like U.S have pumped huge amount of money to make sure that the economy does not go into a deep depression. This Recession is an important lesson for all the global economies. It is very important to note how economies deal with this recession and how economies come out of it successfully. This recession is a very good example as to how the world has become a global village and how an event in one economy, the USA, can trigger a chain of events which has affected various countries throughout the world.
STIMULUS PACKAGES IN INDIA
The government announced a stimulus package on the 7th of December. The stimulus was a 200 billion package to boost the Indian economy from the global economic slowdown. Some of the industries which were worst hit by recession are the textile, export, housing and infrastructure. The stimulus included cutting down on taxes and reduction in interest rates etc. some of the highlights of the first stimulus package are:
• • • •
Incentives for loans on housing for up to Rs.500,000, and up to Rs.2 million Limits under the credit guarantee scheme for small enterprises doubled Incentives for the small to medium enterprises. Full refund of service tax paid by exporters to foreign agents
The second stimulus package was announced on January 2009 which concentrated more on easing foreign borrowing rules and raised the foreign investment limit in bonds to 15 billion. The RBI also slashed policy rates and recapitalized a few state run banks. The main emphasis was to release more money into the economy to stimulate economic growth. The rules for external borrowings were also relaxed. Some of the highlights of the second stimulus package are: Rs1400 has been allocated for the textile industry to clear backlog of Textile Upgradation Fund (TUF). • Incentives were given to exporters to get a 2% interest rate cut. • Rs.7000 crore refinance facility to SIDBI via banks etc. • Rs.4000 crore refinance facility for National Housing Bank. Planned expenditure to be increased for Indira Awas Yojana.
The RBI acted promptly to change key policy rates so that banks could meet the working capital needs of companies. Some of the other measures by RBI included reduction in interest rates and reduction in cash reserve ratio. These are the various stimulus packages undertaken by Government of India to stimulate the economy. Some changes were also made in the new draft code so that the public has more money in hand which would invariably lead to an increase in consumption. Also schemes like the NREGA have tried to increase the consumption of the rural economy which has been successful to some extent.
THE IMPACT OF THE PACKAGES
The Indian economy, though affected by the global recession, was not damaged by it. The Indian economy still recorded a GDP growth 0f 5% to 6% which is among the highest in the world next only to china. Though India was not affected largely by the recession, some of the industries required stimulus packages mainly the export oriented industries. The stimulus packages had to be brought in at the right time to protect them from being further damaged by the recession. Though the stimulus packages did help in aiding recovery of some of the industries, it is too early to comment on the yield of these packages. Some of the problems faced by the stimulus packages are The impact of the stimulus package has not yet produced the desired results in industries like housing, exports and infrastructure. • The money has not reached the intended users. • The fund reach to the infrastructure sector was delayed. • The benefits of lower interest regime were not passed onto the customer quickly.
While the tax sops and other incentives may stimulate the economy, the fiscal burden it created is huge. There is a huge fiscal deficit because of which government has to borrow heavily from RBI and banks which results in a crowding out affect of the private sector. This in turn had a negative effect on the measures proposed by RBI, like increase in the availability of loans to the private sector. The stimulus packages have been successful in combating the recession to some extent. But the implementation has been a bit slow and some of the benefits have not reached the target audience.
The impact of the stimulus packages on the various industries
AUTO INDUSTRY The cut in excise duty has benefited the auto industry immensely. Mainly the duty cuts for commercial vehicles have benefited companies like Ashok Leyland. The increase in taxable income has also resulted in more auto sales. The companies have also benefited from the low raw material costs. This sector has definitely shown signs of recovery as a byproduct of the stimulus package. CONSUMER Volumes have been declining in the toiletry products (bathing soaps) and detergent category. The 2 % percent cut in the excise duty has benefited companies which are not in the Special Economic Zone. This benefit can be passed on the consumer. This can spur additional demand for goods. IT services The STPI tax benefits which have been extended for software companies in the Special Economic Zone have been successful in the helping the I.T companies to tide over the crisis as most of the I.T clients are from U.S and most of the companies have cut their it budgets so this stimulus has helped them to deal with the recession. STEEL The increase in government expenditure for infrastructure has resulted in additional demand for steel. The index of industrial production clearly shows that there has been an increase in the demand for steel after the stimulus package. TEXTILES The textile sector contributes approximately 13% to the overall exports from India. The stimulus package has not resulted in the expected recovery of the textile industry. • The monetary policy measures are expected to benefit the textile industry. • The government extended the Duty Entitlement Passbook (DEPB) scheme till December 31 2009 and restored the rates at those prevailing prior to November 2008 i.e. 7% (increase of 3% from current4%). This may improve the competitiveness of the textile exporters against other lowcost countries like China, Pakistan, Vietnam and others. • EXIM Bank has obtained a line of credit of Rs 5,000 crore from the RBI and will provide preshipment and post-shipment credit, in rupees or dollars, to Indian exporters at competitive rates.
CHALLENGES FACED BY THE GOVERNMENT REGARDING THE ROLL BACK OF STIMULUS.
The government must adopt a wait and watch approach for rolling back the stimulus. Policy rates must be kept unchanged for the short term as the economy is still recovering from the global recession. The government must make sure that they don’t put pressure on banks because of huge fiscal budget. The government must finance its fiscal budget partly by borrowing from RBI and partly by printing money so that there is no crowding out effect. The government must roll back the stimulus in a phased manner so that excess liquidity is sucked out from the system gradually. Inflation is a risk because of the various stimulus packages. So the excess money must be pulled out at the right time in the right way so that inflation would be in control.
Industry Comparison(2008-’09 v/s 2009-’10)
INDEX OF INDUSTRIAL PRODUCTION - SECTORAL (Base : 1993-94=100) Mining -104.73 Month Apr May Jun Jul* Aug Sep Oct Nov Dec Jan Feb Mar Average Apr-Jul 167.2 179.7 290 302.5 222.8 235.3 270.4 282.8 20082009 171.1 177.4 158.8 161.4 160.4 162.9 175.1 175.4 188.1 188.1 183.2 209.8 20092010 176.9 183.2 181.3 177.4 20082009 285 293.1 290.4 291.6 284 298.4 278.6 286.3 304.5 304.8 297.4 326.9 Manufacturing -793.58 20092010 286.1 299.1 313.1 311.5 20082009 218.2 230.1 217.1 225.9 221.6 219.3 231.2 216.4 223.1 227.9 212.7 241.3 Electricity -101.69 20092010 233.6 237.6 234.4 235.4 20082009 266.3 274.6 269.2 271.3 264.7 276.2 262.9 267.6 284 284.8 276.8 305.9 General -1000 20092010 269.3 280.7 291.3 289.7
Growth over the corresponding period of previous year Jul Apr-Jul 2.8 3.7 9.9 7.5 6.9 6 6.8 4.3 4.5 2.6 4.2 5.6 6.4 5.6 6.8 4.6
* Indices for Jul 2009 are Quick Estimates. NOTE : Indices for the months of Apr'2009 and Jun'2009 incorporate updated production data.
183.2 176.9 177.4 171.1
188.1 177.4 161.4 160.4 162.9 175.1 175.4
0 Apr May Jun Jul* Aug Sep Oct Nov Dec Jan Feb Mar
304.5 304.8 297.4
293.1 290.4 291.6
290 280 270 260 250
286.3 284 278.6
245 240 235 230
225.9 233.6 230.1 237.6 234.4 235.4 231.2 227.9 223.1 219.3 217.1 216.4 212.7
225 220 215 210 205 200 195 Apr May Jun Jul*
INDUSTRY IN GENERAL:
291.3 289.7 284 280.7 284.8 276.8
274.6 269.2 271.3
267.6 264.7 262.9
240 Apr May Jun Jul* Aug Sep Oct Nov Dec Jan Feb Mar
www.rbi.org.in www.dnaindia.com www.financialexpress.com www.businessweek.com www.economictimes.indiatimes.com www.india.com
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