New Delhi, December 5
India has started to unveil fiscal stimulus packages to save the economy from recessionary spiral, the first being slashing the petrol and diesel prices by Rs 5 and Rs 2 per litre, respectively. The second part of the package will be unveiled tomorrow, which will include issuing infrastructure bonds worth Rs Rs 50,000 crore, easing of interest rates by Reserve Bank of India and infusing capital in housing banks and banks that lend to small-scale businesses.
Terming the reduction of oil prices as an “interim measure” to ease inflation, oil minister Murli Deora said more such cuts were expected as international crude oil prices keep easing. After the reduction, which takes effect midnight tonight, petrol will cost Rs 45.62 a litre and diesel Rs 32.86 a litre in Delhi. However, there is no change in the prices of cooking gas and kerosene.
The package to be unveiled tomorrow includes liquidating foreign exchange reserves and using them to provide stimulus. The Planning Commission is of the view that forex reserves should be used to ease the liquidity crisis at the moment, though the finance ministry was reluctant to liquidate the reserves.
The mechanics of the package is expected to be issuing infrastructure bonds to India Infrastructure Finance Company Ltd worth Rs 50,000 crore. These bonds will be bought by the RBI and issued to Indian companies who are starved for funds.
This will generate rupees in the system as the bonds will have to be converted into rupees for utilisation, thereby bringing in more rupees in the system. Sources close to making this decision say that converting forex
reserves was important because the dollars are used by the RBI to buy US Treasury Bills adding to the dollars in the Indian system, which in turn, will further depreciate the local currency.
In addition to this, the capitalisation of banks will include lending these funds at 9 per cent, which in turn will be lent by the banks to industrial borrowers at around 11 per cent.
Sources say that the funds for housing sector will also be a part of this package and home seekers will get a loan at around 7 per cent from National Housing Bank.
Small Industries Development Board of India (SIDBI) will also be capitalised through these funds, thus enabling small entrepreneurs to get a loan at 7-8 per cent.
This infrastructure package will have multi-pronged effect, says an economist. Firstly, it will ensure that infrastructure projects like airports, roads and power plants do not get stuck due to the lack of funds. In addition to this, there is employment generated through these projects, which will continue given the fiscal stimulus.
Economists say India is late in unveiling a package given the gravity of the situation. China, France, Germany, UK and Russia have already announced stimulus packages, involving infrastructure spending and additional credit lines to banks. The US had already unveiled the stimulus package and is likely to announce a second package once the President-elect Barack Obama takes office in mid January.
