3rd Stimulus Announced Amidst Ballooning Fiscal Deficit and Falling Sovereign Credit Rating
Day before yesterday, the caretaker Finance Minister of India Mr. Pranab Mukherjee (the Ministry usually lies with the Prime Minister Dr. Manmohan Singh who is recovering from By-pass surgery) announced another round of stimulus package to bring impetus into the economy. This is the third such initiative by the government in as many months. This time no fund is to be infused to help the market reeling under severe liquidity crunch but the latest effort is aimed at reducing production costs of goods so that demand increases and industry grows. For this purpose the government has reduced excise duties on several products by 2 percent to 8 percent from existing rate of 10 percent. This effectively means cheaper steel, cement and consumer durable goods. The automobile sector which had a booming last year but suffering from current economic meltdown will not benefit directly. But due to cheaper rates of raw materials and accessories it might get some indirect lift. Also the heavy vehicle sector which has excise rate of 20 percent will get direct benefit from the latest move.
But the highest gain will be reaped by the service sector as service tax too was slashed from present level of 12 percent to 10 percent. It will benefit all those industries engaged in service sectors like hospitality, BPO and telecom. Experts expect that mobile rate will come down due to reduction in service tax. This reduction in taxes will cost the government to the tune of Rs. 300 billion.
This third stimulus package was announced on a day global rating agency Standard & Poor downgraded India’s sovereign credit rating due to ever growing fiscal deficit that is likely to be around 11.2 percent of GDP (Rs. 3620 billion) during this fiscal ending 31st March. Being an election year, the government took many populist measures like hiking central government employees’ salaries, writing off agricultural debt, high crude prices for most part of the year and lastly but not the least – the economic stimulus packages. This down gradation will not harm the government as it seldom borrows from foreign markets but it might give hard time to Indian business community as many companies raise money through external borrowings.
Of course Indian industry is upbeat with reduction in taxes and promised to slash rates of all goods coming under purview. Most welcomed the government initiative.
Chandrajit Bannerjee, the CII Directory-General says –
“The fiscal incentives become very important and excise duty cut will have a major positive impact on the corporate manufacturing sector.”
Similar view was expressed by Harsh Pati Singhania, President, FICCI –
“These measures will help the domestic economy and keep it moving forward at a time when the external markets are in bad shape.”
However, industry leaders are expecting another round of interest rate cut to buttress the recent fiscal measures. Many widely believe, the Apex bank, Reserve Bank of India will soon announce further rate cuts to complement with governments initiative.