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Good, but not good enough

Price reduction on Friday, rate reduction on Saturday and tax cuts on Sunday. The first weekend of December saw the government announcing a slew of both fiscal and monetary measures. But a flagging economy needs more.

Print Edition: December 28, 2008

Rate cuts: Three years of tightening, three months of loosening
The RBI cut the repo rate (the rate at which banks borrow from RBI) and the reverse repo rate (the rate the RBI pays to banks for their deposits) by 1 percentage point each to 6.5 per cent and 5 per cent respectively. Before this, the apex bank had cut the repo rate by 1.5 percentage points and the cash reserve ratio (CRR) by 3.5 percentage points since September this year. All these RBI measures released roughly Rs 3,00,000 crore ($60 billion) of liquidity into the system.

What to expect in future: Banks will be more inclined to cut rates now. Home loans of up to Rs 2 lakh per unit per family to be classified as priority sector lending. With inflation likely to drop to low single digit levels, the RBI could further ease its policy rates.

Tax cuts and more spending
The fiscal boost seems smaller, perhaps because government finances aren’t in good shape. An acrossthe-board excise duty cut on all non-petroleum products of 4 percentage points and increased plan (mainly infrastructure related) expenditure by Rs 20,000 crore are the two main components of the fresh fiscal stimulus. The India Infrastructure Finance Company Limited (IIFCL) has been granted approval to raise Rs 10,000 crore through tax-free bonds by end-March 2009. Highways and ports are likely to be the key beneficiaries. Loans to exporters have been made easier and cheaper, additional allocations for export incentive schemes of Rs 350 crore have been made, and guarantees for exports have been announced.

What to expect in future: Further tax cuts, if any, will be geared for exporters. Further spending boost is likely, the size of which will depend on the revenue buoyancy in the next one month.

Fuel price cuts: An unasked-for bounty
The cut in the prices of petrol and diesel (by Rs 5 and Rs 2 a litre, respectively) wasn’t something people or industry were clamouring for. But it could help create some additional spending at a time when prospects of demand drought lie ahead. Indian Oil Chairman S. Behuria expects another round of price cuts.

Rajiv Kumar, Director and Chief Executive, ICRIER
What’s good about the package: The export incentives are necessary.
What more could have been done: Without removal of procedural complexities, infrastructural shortages and labour rigidities, a sustainable impact on exports won’t be possible.

Rohini Malkani, Economist, Citigroup, India
What’s good about the package: The measures are adequate to address some of the problems. They will prevent a further fall in demand across sectors.
What more could have been done: These measures may not be sufficient to reverse the deceleration in growth.

Rashesh Shah, CMD, Edelweiss Capital
What’s good about the package: The measures are adequate to address some of the problems. They will prevent a further fall in demand across sectors.
What more could have been done: More on infrastructure spending.

U.R. Bhat, MD, Dalton Capital Advisors
What’s good about the package: The fiscal package could address the problems of lack of demand and a general lack of confidence.
What more could have been done: The package can’t be a panacea for all ills. Some problems are deep-rooted.

S. Roy, Chief Economist, Tata Group
What’s good about the package: The 4 per cent across-the-board cut in CENVAT will spur limited spending.
What more could have been done: The real issues for exporters—the counter -party risk and the need to find new import markets—remain unaddressed.

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