Another half-hearted stimulus package

After the RBI’s stimulus package announced on Saturday, it was the turn of the government. The central government introduced a 10-point, Rs 320 bn package on Sunday to stimulate the Indian economy. Ironically, this so called ‘stimulus’ will account for merely 0.6% of the country’s GDP! Not surprisingly, the industry’s reaction to the package has been lukewarm as it was expecting an even larger package. The funding routed to the infrastructure sector is to the tune of Rs 200 bn. Central valued added tax has been cut by 4% across the board, other than valued added tax. Labour intensive exports such as textiles will also receive sops. Small scale industries will be eligible for funding without collateral to the tune of Rs 10 m per entity. Although the government has not ruled further steps, it operates under severe fiscal constraints. It may be noted that the Rs 320 bn infusion will nearly double India’s fiscal deficit from an earlier projected 2.5% to 5% of GDP by the end of FY09. When viewed in combination with the RBI’s actions, we believe the efforts definitely point towards the right direction. However, they may not be sufficient to stimulate the economy.