The Centre’s second fiscal stimulus package, announced almost a month after the first on December 7 last year, covers a series of measures aimed at easing credit delivery to sectors impacted most by the economic slowdown, but contains limited deficit-financed government spending.
The second instalment liberalised overseas borrowing norms, restored benefits to exporters, set up an alternative channel of finance for non-banking finance companies and allowed state-run India Infrastructure Finance Company Ltd (IIFCL) to issue additional tax-free bonds.
The fiscal incentives announced so far will continue till a new government gets an opportunity to present a full budget after the general elections mid-2009, Montek Singh Ahluwalia, deputy chairman of the Planning Commission, said while announcing the package.
The vote-on-account that will be presented by the current Congress-led alliance before the elections will include the changes effected in the packages. Ahluwalia did not reveal the cost of this round of fiscal incentive, except to add that tax cuts would involve revenue foregone of Rs 40,000 crore in the current fiscal.
The first stimulus package cost the government around Rs 31,000 crore — including additional plan expenditure of Rs 20,000 crore and a 4-percentage-point cut in excise duty. No further fiscal measures like tax cuts will be announced in the current financial year, Ahluwalia added.
The combination of monetary and fiscal steps taken this fiscal would result in additional credit of Rs 56,000 crore in the fourth quarter.
Freed pricing norms for overseas borrowing: The package announced in coordination with the central bank freed overseas borrowing norms from interest rate caps that were fixed to the London Interbank Offered Rate (Libor).
“Removing the artificial cap on ECBs will help infrastructure developers and overseas investors arrive at better pricing,” said Sanjay Sethi, Head (Infrastructure), Kotak Investment Banking.
Increased refinance for infrastructure: IIFCL, which was designated to act as refinancer for loans to the core sector, is being allowed to borrow Rs 30,000 crore by issuing tax-free bonds — three times more than the initial sanctioned amount in first week of December. This will enable additional infrastructure financing of Rs 75,000 crore over next 18 months.
Allowing the IIFCL to borrow more money from the market will help banks disburse more funds for infrastructure, helping companies achieve financial closure for key projects, Sethi said.
But some analysts think this alone might not be anough. “The key challenge is what rate of interest IIFCL will raise the money from the market,” said Tapash K Majumdar, CFO, C&C Constructions Ltd. “If the cost of borrowing is high, then the cost of downstream financing will also be high,” he added.
Exporters unhappy: For exporters, the government tried to tackle the twin challenges: lack of credit and making Indian products competitive in overseas markets.
To this end, the government restored the Duty Entitlement Passbook (DEPB) scheme to pre-November levels, enabling exporters to claim a higher amount of tax paid on imports used to make exported products.
Secondly, the RBI will provide a credit line of Rs 5,000 crore to Exim Bank, which will provide export credit at a time when financial institutions have developed a risk-aversion to lending.
However, exporters say their additional demands like a moratorium on term loans and additional interest subsidy of 2 per cent were not considered. But experts say any government incentive is unlikely to work until the major developed economies generate demand.
States allowed to tap market: State governments have also been allowed to borrow an additional 0.5 per cent of their Gross State Domestic Product (GSDP), amounting to about Rs 30,000 crore, for capital expenditure.
“Governments are facing constraints in financing expenditure because of slower revenue growth,” Ahluwalia said.
This will enable fiscally well-managed states to borrow from the market and will remove constraints for growth on the credit side for the states, said D K Joshi, economist with Crisil Ltd, a ratings and advisory firm.
However, he said some states will find it difficult to utilise this route, adding it may also exert pressure on interest rates at a time when yields on government securities are rapidly falling.
|WHAT THE GOVERNMENT DID|
|TO EASE ACCESS TO OVERSEAS LOANS
Interest rate ceiling on external commercial borrowings (ECBs) scrapped under RBI approval route
|Integrated townships permitted as an end-use of ECBs under RBI approval route|
|Non-banking finance companies (NBFCs) dealing exclusively with infrastructure financing permitted to access ECBs from financial institutions, under RBI approval route|
|TO ENHANCE CREDIT FLOWS
Foreign institutional investor investment (FII) in rupee-denominated corporate bonds in India to be increased from $6 billion to $15 billion
|SPV to be designated to provide about Rs 25,000 crore support against investment-grade paper to NBFCs fulfilling certain conditions.|
|Credit targets of government-owned banks to be raised to reflect the needs of the economy. Government will monitor, sectoral credit by these banks every fortnight.|
|Special monthly meetings of state-level bankers’ committees to oversee the resolution of credit issues of micro, small and medium enterprises. Department of MSME and department of financial services will jointly set up a cell to monitor progress.|
|Guarantee cover by Credit Guarantee Fund Trust increased to 85% for credit facility up to Rs 5 lakh for micro and small enterprises|
|Govt plans Rs 20,000 crore recapitalisation for banks over the next two years.|
|FOR INFRASTRUCTURE/ CAPEX
States will be allowed to raise in the current financial year additional market borrowings of 0.5% of Gross State Domestic Product (GSDP), amounting to about Rs 30,000 crore, for capital expenditure
|India Infrastructure Finance Company being enabled to access in tranches an additional Rs 30,000 crore through tax-free bonds to fund additional projects of about Rs.75,000 crore at competitive rates over the next 18 months|
DEPB rates restored to pre-November 2008 rates. Scheme extended till December 31, 2009.
|Duty drawback benefits for knitted fabrics, bicycles, agricultural hand tools and specified categories of yarn enhanced with retrospective effect from September 1, 2008.|
|A committee chaired by finance secretary & including secretaries of the departments of revenue and commerce to examine and resolve procedural issues on “a fast-track basis”|
|Exim Bank has obtained from RBI a line of credit of Rs 5,000 crore and will provide pre-shipment and post-shipment credit, in rupees or dollars, to exporters at competitive rates|
|FOR COMMERCIAL VEHICLES
States, as a one-time measure up to June 30, 2009, will be provided assistance under the JNNURM to buy buses for their urban transport systems
|Accelerated depreciation of 50% to be provided for commercial vehicles to be bought on or after January 1, 2009 and up to March 31, 09|
|Arrangement to be worked out with leading government-owned banks to provide credit to NBFCs specifically to buy commercial vehicles|
Exemptions from counter-vailing duties (CVD) on TMT bars and structurals, and CVD and Special CVD on cement, which were given to contain inflation, are being withdrawn
|Full exemption from basic customs duty on zinc and ferro-alloys, which was also provided to contain inflation, is being withdrawn|
Limited fiscal space: With government spending already over shooting initial projections for the fiscal deficit, experts say the only room available in this pckage was to change indirect taxes and export benefits.
“There is no room for new announcements because of fiscal constraints,” said Subir Gokarn, chief economist with Standard & Poor’s, a ratings and advisory firm. “There is money available in the system in terms of large expenditure remaining unutilised by large ministries.”
The centre has already exceeded its initial budget deficit target of 2.5 per cent in the first eight months of the current fiscal, according to data released by the Controller General of Accounts. The fiscal deficit stood at 3.1 per cent till November-end.
Ahluwalia today conceded that fiscal deficit would be between 5.5 and 6 per cent in the current financial year, because of the slowdown in revenue collections, tax cuts announced and also additional expenditure.
He predicted a growth rate of around 7 per cent in the current fiscal, adding that economy had definitely slowed down. “The growth would have been much lower but for the measures taken so far,” he said.
The government also has drawn up plans to recapitalise state-run banks to the tune of Rs 20,000 crore in the next two years to support credit growth.