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New Delhi, Dec 8: Faced with a slowing economy that's refusing to respond to monetary measures such as interest rate cuts, the government on Sunday took the fiscal route to stimulate growth. It announced an across-the-board 4% cut in excise duties — which even if it had come as part of the annual budget would have been considered a big deal. Small wonder then that this is being called a mini-budget.

Will the blanket cut bring down prices and encourage consumers to start shopping again, which in turn would create demand for industry? Planning Commission deputy chairman and Prime Minister (and finance minister) Manmohan Singh's trusted man Montek Singh Ahluwalia, who announced the package, expressed the hope that manufacturers would use the opportunity provided by the excise duty cut to reduce prices. However, initial reactions from industry indicated that not all of them are planning to pass on the benefit to consumers.

The stimulus package also packs in a Rs 20,000 crore increase in plan expenditure — it's the time-tested formula of getting government to spend money when the private sector isn't. The idea is that government buying will put money in industry's pocket and help kickstart the economy.

Other measures included interest rate cuts on loans for infrastructure and exports, while a separate package for home loans has been promised soon.

The government's attempt at boosting demand by cutting taxes comes about three weeks after then finance minister-now-home minister P Chidambaram tried in vain to nudge industry to cut prices to boost demand.

The excise duty cut applies to all manufactured goods except petroleum and those where the current rate is less than 4%. If manufacturers do pass on the cut — a big if — ex-factory prices should come down by 4%, but retail prices are likely to decline less since overheads and other post-production costs would not be affected.

The government's decision to cut excise duty by 4% will also impact imported goods, since the countervailing duty applicable to them will come down by the same amount. The 4% cut is estimated to cost the government Rs 8,700 crore by way of foregone revenues. If demand rise, the revenue loss would be smaller since what the government would lose by way of cutting duty it would make up through larger volumes.

Ahluwalia said the government was not worried about the revenue loss or about the fiscal deficit. He admitted that the stimulus package would lead to widening of the fiscal deficit, but said the main aim of the government at present was to arrest the slowdown.

Announcing the intention to increase plan expenditure by Rs 20,000 crore, Ahluwalia pointed out that with this, the government would be spending Rs 300,000 crore under plan and non-plan expenditure in the next four months of the current fiscal. This includes Rs 280,000 crore, provided in the budget but not spent so far.

The government also decided to allow Indian Infrastructure Finance Company Limited (IIFCL) to raise Rs 10,000 crore in tax-free bonds. This will enable it to raise funds at a lower interest rate. IIFCL will use the funds to refinance low-interest bank lending to infrastructure projects under public-private partnership (PPP).

The lower rates, Ahluwalia said, would improve the viability of projects. He hoped private companies, which had shied away because of high interest rates, would now show interest in implementing PPP infrastructure projects. If that happens, it would boost demand for steel, cement and other items.

Ahluwalia said that besides the Rs 4,000 crore line of credit provided by RBI to National Housing Bank (NHB) to lend to housing finance companies, the public sector banks will soon announce a package for borrowers of home loans up to Rs 20 lakh.

To counter the slump in exports, the government has decided to subsidise interest costs of exporters by up to 2 percentage points subject to a minimum rate of 7% per annum. An additional fund of Rs 1,100 crore has also been provided to ensure full refund of duties, including service tax, paid on inputs.

For medium, small and micro enterprises (MSMEs), the government increased the guarantee cover on loans to lending institutions from Rs 50 lakh to Rs 1 crore with guarantee cover of 50%. The government has also asked PSUs to make prompt payment to MSMEs. These measures are in addition to the Rs 7,000 crore refinance facility by RBI to the Small Industries Development Board of India (SIDBI).

Import duty on naphtha for the power sector has been reduced to zero from 5% in a bid to bring down costs for the sector. For the textile sector — one of the country's largest employers and exporters — the government has made an additional allocation of Rs 1,400 crore to clear backlog in the technology upgradation fund (TUF) scheme. This is aimed at helping textile units upgrade to improve competitiveness.