Undoubtedly, the 'fiscal stimulus' package is a step in the right direction. But Ratan Lal Bhagat analyses and argues that it is too meagre an amount to rev up the economy.
Will history repeat itself? The man who had engineered and introduced revolutionary and liberalising economic reforms in 1991, to bring about a paradigm shift in the Indian economy, is at it once again. His government has drawn a blueprint for a stimulus package to get the sluggish economy back on track. The move is in consonance with the efforts of the central banks of developing as well as developed nations, each pulling out their version of a stimulus package one after the other (Uncle Sam's anticipated $1 trillion, China’s $586 billion and Japan’s $51 billion!) to minimise and overcome the current economic and financial turmoil. India too has joined the bandwagon with a whopping Rs 320 billion package (approx. $6 billion). The pertinent question is – can the revival package get the economy back on its feet?
The government's multi-dimensional fiscal stimulus package aims to boost the output growth across various sectors. The objective behind the move is to ensure the stability of the financial system in general and counter the impact of global recession on India's economic growth. The revival package includes an additional plan of expenditure by pumping in another Rs 200 billion in the system. An estimated excise give-aways of Rs 87 billion, labour-intensive export sectors getting a two per cent interest subvention and steps for improving the cash and credit crunch situation are also part of the package. “The current stimulus package introduced by the Indian government is surely a positive move. The package has arrived at the right time and will surely help Indian economy combat the current downturn and revive the system,” R I S Sidhu, Chief General Manager, Punjab National Bank, told TSI. On the monetary side the RBI too has pitched in for the cause by slashing the benchmark repo and reverse repo rates by 100 basis points each, to infuse more liquidity in the system.
Well, on the face of it, if one considers the package along with the monetary policy measures taken by RBI, looks good enough to push the GDP growth rate up again. The government’s bold decision to cut the central value added tax (cenvat) by four per cent will certainly help prices come down across the board and stimulate demand. In the meantime, inflation continued its downslide falling to eight per cent from the earlier 8.40%. It is expected to fall even further in the coming weeks, as the impacts of the fuel price cut and the excise duty cuts get reflected in the inflation data. Still, the package seems to be lacking enough teeth to fuel adequate impetus. Harsh Pati Singhania, Managing Director, JK Paper Ltd, avers, “Announcements made by RBI and the Central Government to stimulate growth are steps in the right direction. While attempt has been made to touch various sectors, more needs to be done.” If one compares it with the $586 billion package announced by China, the Indian package is pittance. True, optimists argue that size does not matter, and Indian fundamentals are better than that of China. But then it is clear enough that this is the time when India must capitalise on this 'plus' (stronger fundamentals) and push itself to bridge the gap it has with China. Definitely, yes! India must use the situation and start blazing all its guns not only to recover from the mess, but also to climb up the ladder of global economic status.
Well, the cenvat cut definitely translates into a significant excise duty savings of anywhere between 28 to 50 per cent on manufactured products. But in the wake of a weakening demand, companies are unlikely to be able to retain the benefits of this excise cut. Nevertheless, the cut surely allows the companies a comfort zone to reduce product prices and offset sluggish demand, without further sacrifice on the margins. “Major beneficiaries of this are mainly consumer goods producers, FMCGs and automobiles, while others might have to wait a little longer till something more fruitful comes their way,” says N Wadhwa, Director, SKI Capital Ltd.
Recognising the need for a fiscal stimulus, the government has consciously allowed the fiscal deficit to expand beyond the originally targeted level because of the loan waivers, issue of oil and fertiliser bonds and higher levels of food subsidy. Additionally it has provided a contra- cyclical stimulus, seeking authorisation for the additional plan expenditure. Industry experts across the sectors agree that more needs to be done; however, the initiative will certainly inject optimism in the economy.
But question can also be raised about the viability and adequacy of the additional spending measures. Moreover, the additional expenditure plan and infrastructure spendings are to be funded through government bonds.
Thus, the desire for immediate liquidity is out of the question,
as these bonds are redeemable only after a specific period of time. “Even if the players who are provided with these try to sell them in the market to raise the required cash, they would hardly find any takers for the same,” supports Wadhwa.
The architects of the stimulus package seem to have missed the point: that a cut in the various tax rates would have proved to be more viable and would have been more impactful than the additional expenditure for a number of reasons.
First, a deduction applied in the tax rate surely would have a similar impact as that of an additional spending package, but the fact that catches the eye is that tax rate cut works across the board, rather than having a focused impact.
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Source : IIPM Editorial, 2008
Will history repeat itself? The man who had engineered and introduced revolutionary and liberalising economic reforms in 1991, to bring about a paradigm shift in the Indian economy, is at it once again. His government has drawn a blueprint for a stimulus package to get the sluggish economy back on track. The move is in consonance with the efforts of the central banks of developing as well as developed nations, each pulling out their version of a stimulus package one after the other (Uncle Sam's anticipated $1 trillion, China’s $586 billion and Japan’s $51 billion!) to minimise and overcome the current economic and financial turmoil. India too has joined the bandwagon with a whopping Rs 320 billion package (approx. $6 billion). The pertinent question is – can the revival package get the economy back on its feet?
The government's multi-dimensional fiscal stimulus package aims to boost the output growth across various sectors. The objective behind the move is to ensure the stability of the financial system in general and counter the impact of global recession on India's economic growth. The revival package includes an additional plan of expenditure by pumping in another Rs 200 billion in the system. An estimated excise give-aways of Rs 87 billion, labour-intensive export sectors getting a two per cent interest subvention and steps for improving the cash and credit crunch situation are also part of the package. “The current stimulus package introduced by the Indian government is surely a positive move. The package has arrived at the right time and will surely help Indian economy combat the current downturn and revive the system,” R I S Sidhu, Chief General Manager, Punjab National Bank, told TSI. On the monetary side the RBI too has pitched in for the cause by slashing the benchmark repo and reverse repo rates by 100 basis points each, to infuse more liquidity in the system.
Well, on the face of it, if one considers the package along with the monetary policy measures taken by RBI, looks good enough to push the GDP growth rate up again. The government’s bold decision to cut the central value added tax (cenvat) by four per cent will certainly help prices come down across the board and stimulate demand. In the meantime, inflation continued its downslide falling to eight per cent from the earlier 8.40%. It is expected to fall even further in the coming weeks, as the impacts of the fuel price cut and the excise duty cuts get reflected in the inflation data. Still, the package seems to be lacking enough teeth to fuel adequate impetus. Harsh Pati Singhania, Managing Director, JK Paper Ltd, avers, “Announcements made by RBI and the Central Government to stimulate growth are steps in the right direction. While attempt has been made to touch various sectors, more needs to be done.” If one compares it with the $586 billion package announced by China, the Indian package is pittance. True, optimists argue that size does not matter, and Indian fundamentals are better than that of China. But then it is clear enough that this is the time when India must capitalise on this 'plus' (stronger fundamentals) and push itself to bridge the gap it has with China. Definitely, yes! India must use the situation and start blazing all its guns not only to recover from the mess, but also to climb up the ladder of global economic status.
Well, the cenvat cut definitely translates into a significant excise duty savings of anywhere between 28 to 50 per cent on manufactured products. But in the wake of a weakening demand, companies are unlikely to be able to retain the benefits of this excise cut. Nevertheless, the cut surely allows the companies a comfort zone to reduce product prices and offset sluggish demand, without further sacrifice on the margins. “Major beneficiaries of this are mainly consumer goods producers, FMCGs and automobiles, while others might have to wait a little longer till something more fruitful comes their way,” says N Wadhwa, Director, SKI Capital Ltd.
Recognising the need for a fiscal stimulus, the government has consciously allowed the fiscal deficit to expand beyond the originally targeted level because of the loan waivers, issue of oil and fertiliser bonds and higher levels of food subsidy. Additionally it has provided a contra- cyclical stimulus, seeking authorisation for the additional plan expenditure. Industry experts across the sectors agree that more needs to be done; however, the initiative will certainly inject optimism in the economy.
But question can also be raised about the viability and adequacy of the additional spending measures. Moreover, the additional expenditure plan and infrastructure spendings are to be funded through government bonds.
Thus, the desire for immediate liquidity is out of the question,
as these bonds are redeemable only after a specific period of time. “Even if the players who are provided with these try to sell them in the market to raise the required cash, they would hardly find any takers for the same,” supports Wadhwa.The architects of the stimulus package seem to have missed the point: that a cut in the various tax rates would have proved to be more viable and would have been more impactful than the additional expenditure for a number of reasons.
First, a deduction applied in the tax rate surely would have a similar impact as that of an additional spending package, but the fact that catches the eye is that tax rate cut works across the board, rather than having a focused impact.
For Complete IIPM Article, Click on IIPM Article
Source : IIPM Editorial, 2008
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