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2nd January, 2009  Source:Asani Consulting

Within a month of the announcement of an economic stimulus package to contain the recession in the Indian economy, the government of India (GoI) has declared yet another stimulus package today. Earlier in the day, the Reserve Bank of India (RBI) had announced a monetary stimulus package to address the current liquidity shortage in the economy.

GoI declares second ‘stimulus package’ to beat recession

Government does not envisage any further measures in the current fiscal year


2 January 2009


Within a month of the announcement of an economic stimulus package to contain the recession in the Indian economy, the government of India (GoI) has declared yet another stimulus package today. Earlier in the day, the Reserve Bank of India (RBI) had announced a monetary stimulus package to address the current liquidity shortage in the economy.


Monetary stimulus

As part of the monetary stimulus key interest rates have been reduced again by the RBI. The rate-cuts aimed at increasing the money supply in the economy are:

         i.            Cash Reserve Ratio (CRR) cut by 50 basis points to 5%,

       ii.            Repo rate cut by 100 basis points to 5%, and

      iii.            Reverse Repo rate cut by 100 basis points to 4%.


Consequently, the commercial banks are expected have an additional liquidity of about Rs 20,000 crores at their disposal. The prime lending rates (PLRs) and deposit rates of the banks are likely to come down due to the additional liquidity injected into the economic system. While the PSU banks have already indicated that the rate-cuts would be looked at on an immediate basis, implementation of the package might still remain a challenge. Private sector banks might not choose to lower interest rates on an immediate basis and would rather wait and watch cues emanating from the global economy. Hence, there are apprehensions that availability of loans may not improve drastically anytime soon.


Further liberalization of ECB norms

Further liberalization of the External Commercial Borrowing (ECB) policy has been declared by the Government of India (GoI) and the RBI:


(a) The ‘all-in-cost’ ceilings on ECBs would be removed, under the approval route of RBI;

(b) To facilitate access to funds for the housing sector, the ‘development of integrated townships’ would be permitted as an eligible end-use of the ECB, under the approval route of RBI;

(c) NBFCs, dealing exclusively with infrastructure financing, would be permitted to access ECB from multilateral or bilateral financial institutions, under the approval route of RBI.

(d) In order to propel the corporate bond market, FII investment limit in rupee denominated corporate bonds in India would be increased from US $ 6 billion to US $ 15 billion.

(e) It has now been decided to permit the corporate in the Hotels, Hospitals and Software sectors to avail ECB up to USD 100 million per year for both foreign currency and/or Rupee capital expenditure for permissible end use, other than for land acquisition, under the Automatic Route.


[The measures (a) to (c) would be reviewed after June 30, 2009].

Policy measures in the pipeline

The flow of credit to the economy will be further enhanced by policy measures in the pipeline at present:

(i) A special purpose vehicle (SPV) will be designated shortly to provide liquidity support against investment grade paper to Non Banking Finance Companies (NBFCs) fulfilling certain conditions. The scale of liquidity potentially available through this window is Rs.25000 crores.

(ii) An arrangement will be worked out with leading Public Sector Banks to provide a line of credit to NBFCs specifically for purchase of commercial vehicles.

(iii) Credit targets of Public Sector Banks are being revised upward to reflect the needs of liquidity in the economy.

(iv) Special monthly meetings of State Level Bankers’ Committees would be held to oversee the resolution of credit issues of micro, small and medium enterprises by banks.

(v) In order to enhance flow of credit to micro enterprises, it has been further decided to increase the guarantee cover extended by Credit Guarantee Fund Trust to 85% for credit facility up to Rs.5 lakh. This will benefit about 84 per cent of the total number of accounts accorded guarantee cover. 


Policy support to the Export sector

Exporters are hit by recessionary conditions in the global markets besides the spiralling appreciation of the Indian currency that started in November 2008. Measures to support to the export sector are:

(i) DEPB rates have been restored to those prevailing prior to November 2008 levels. Scheme extends till 31.12.2009.

(ii) Duty drawback benefits enhanced on certain items (including knitted fabrics, bicycles, agricultural hand tools and specified categories of yarn). These changes will take effect retrospectively from September 1, 2008.

(iii) Committee under the chairmanship of the Finance Secretary to address administrative and procedural issues in the export sector to avoid delays and escalating transaction costs

(iv) EXIM Bank has obtained from RBI a line of credit of Rs.5000 crores and will provide pre-shipment and post-shipment credit, in rupees or dollars, to Indian exporters at competitive rates.


Other measures

1.      Fiscal measures such permission to the states to raise market borrowings of 0.5% of their Gross State Domestic Product (GSDP) in the current financial year, amounting to about Rs 30,000 crore, for capital expenditures were declared

2.      India Infrastructure Finance Company (IIFCL) will start active market participation and enable funding of mainly highways and port projects on hand of about Rs.25000 crore. To fund additional projects of about Rs.75,000 crore at competitive rates over the next 18 months, IIFCL is being enabled to access in tranches an additional Rs.30,000 crores by way of tax free bonds once funds raised in the current year are effectively utilized

3.      Exemptions from CVD on TMT bars and structurals, and from CVD and Special CVD on cement are being withdrawn. Full exemption from basic customs duty on zinc and ferro alloy is being similarly withdrawn

4.      GoI will work with State governments to encourage them to release land for low income and middle income housing schemes

5.      States, as a onetime measure up to 30.06.2009, will be provided assistance under the JNNURM for the purchase of buses for their urban transport systems. A scheme towards this end will be announced shortly

6.      Accelerated depreciation of 50% will be provided for commercial vehicles to be purchased on or after 1.1.2009 up to 31.03.09.

7.      Fiscal spending would be closely monitored to expedite the pace of expenditure for all schemes and programmes. Government will set up a fast track monitoring committee to ensure expeditious approval and implementation of central projects. Chief Ministers of the states are being advised to do the same.


Real Estate sector: Key takeaways

v       Financing option through ECBs has been allowed; it was closed to the real estate developers since the crisis erupted. This would help developers to complete many pending projects stalled due to credit crunch. This relaxation though is limited to the residential segment only, whereby integrated township projects get the benefit

v       Permission granted to the Hotels, Hospitals and Software sectors to avail ECB up to USD 100 million per year (except land acquisition) is also suppose to have a bearing on the real estate sector in terms of increasing real estate demand

v       Land for the real estate sector would be available at cheaper rates so that housing for low and middle income groups, which is also known as affordable housing is expected to get a boost. (This will serve as a major incentive to the real estate sector as cheaper loans for housing up to Rs. 20 lakhs were announced in the first stimulus package announced on 7 December 2008)

v       Declining interest rates would bring down the housing loan rates further implying higher home sales

v       Removal of the exemption of custom duties for cement and ferro-alloys imports, which are input materials for the real estate sector, might increase their price   

v       With IFCL starting its market activity, there lies an immense opportunity in the infrastructure sector mainly in the current highway and port projects.
Keywords:Stimulus package, Real Estate
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