PTI
NEW DELHI, Jan 1: The government on Friday announced a fresh stimulus to reverse the economic slowdown, taking its total revenue loss to Rs 40,000 crore,
through higher public spending and easier credit especially for exports, housing and small industries. ( Watch )
Simultaneously, RBI slashed key policy rates and ratios to pump in an additional Rs 20,000 crore into the banking system, while government asked PSU banks to increase credit targets to ensure maximum fund disbursals at the least cost, particularly when inflation is ebbing.
Signalling a shift in focus from inflation management to growth, the package -- the second in a month and the last for this fiscal -- is part of a process initiated by the government and RBI in October in the face of crumbling financial system and recessionary pressure in the West.
The RBI had during the period released over Rs 3,20,000 crore into the banking system to usher in a low interest regime in the economy, as prices of fuel, metals and agri commodities plunged easing inflationary pressure.
Announcing the much-awaited package, Planning Commission deputy chairman Montek Singh Ahluwalia told reporters: "Other measures designed to counter recessionary trends" include withdrawal of countervailing duty exemptions on some steel products and cement originally provided to contain inflation.
"Banking system is a very critical and PSU banks need to be recapitalised," he said.
The RBI signaled interest rates to ease further by slashing the short-term rates at which it lends and borrows from banks (repo and reverse repo) by 100 basis points each.
It also cut the percentage of money that banks need to keep in reserve by 0.50 percentage points, thus releasing Rs 20,000 crore into the system.
"You will certainly have a fiscal deficit which will be more than 3 percentage point of GDP above what was originally targeted. These are Planning Commission estimates...," Ahluwalia said indicating fiscal deficit would be over six per cent this year.
The government package also provides for recapitalising them by Rs 20,000 crore over the next two years.
While allowing states to access market for borrowing about Rs 30,000 crore to meet additional expenditure, the package provides for easing External Commercial Borrowing norms and raising FII investment limit in rupee-denominated instruments to USD 15 billion from USD six billion now.
Special attention was paid to housing sector, auto, macro and micro industries and infrastructure sectors through a series of measures including provision for higher credit and greater liquidity for the non-banking financial companies.
Ahluwalia said he does not expect any single set of measures to insulate the economy, but said the two packages would ensure 7 per cent growth for this fiscal.
Economists said the package was well-intended, but implementation could be a challenge.
The commercial vehicle manufacturers, who have been hit hard due to decline in sales, are expected to see demand revival with accelerated depreciation of 50 per cent on vehicles purchased between January-March this year.
Finance secretary Arun Ramanathan said the revenue implication from the overall package would be Rs 40,000 crore.
Funding has also been facilitated for pending highways and port projects of about Rs 25,000 crore.
The India Infrastructure Finance Company Ltd will access an additional Rs 30,000 crore by tax-free bonds to finance projects worth Rs 75,000 crore over the next 18 months.
The IIFCL bonds would be issued soon for raising first tranche of funds.