Byapaar.com -The Indian Business Blog

First of all, Happy and Prosperous New Year -2009 to all my readers and others. Hopefully, the New Year will bring much joy to all of us which were gone in 2008 due to economic downturn that occurred suddenly. And it seems governments are not sitting idle – indeed Indian government is trying its best to lessen the effect of global economic meltdown on Indians. Last Friday, the Prime Minister cum Finance Minister of India, Dr. Manmohan Singh announced second round of packages meant to stimulate the economy and protect it from global slowdown. In the first package , the government mainly focused on releasing more funds in the market by way of reducing interest rates and thereby improving liquidity. It also offered soaps to exporters. It seems the first package was aimed at immediate goals whereas the second package is more fundamental and might go a long way in reviving the economy.

In the first place the government doubled the cap on foreign investors in bonds and made ways for states to raise around Rs. 300 billion market loans. Moreover, the new initiative has given special emphasis on the automobile industry that has gone back gear after the economic crisis started. A plan of depreciation of fifty percent on car finance has been announced to shore up demand for the beleaguer industry. Exporters have seen rollback of entitlement passbook scheme rates amidst negative export growth in experienced in November.

On the financial sector, The Reserve Bank of India has announced further reduction in REPO and reverse-REPO rates. Special vehicle has been announced for improving liquidity in the non-banking financial market that may raise up to 250 billion Rupees. Rs 200 billion has been earmarked for state owned banks over net two years.

The government says it is not possible for more stimulus packages within this financial year that ends on March 31^st due to political and electoral compulsions. Over all, the two packages announced will take the country’s fiscal deficit to 5-6 percent from a comfortable 2.5 percent now.

Industry has more or less welcomed the anticipated second round of package and the stock market gained more than around 3 percent. But as always, industry want more from the government and argues that these schemes are not enough to push industrial growth which has come down to 0.4 percent from 5 percent at this time last year.

Indian Rupees slipped below the psychological mark of Rs. 50 against the US dollar on Wednesday as it came under heavy pressure from investors and oil companies in a market where the greenback has been scarce for the whole year. The global financial turmoil and imminent recession in industrialized countries have made foreign investors wary of the market and now they have started to withdraw funds from Indian equity

market. According to latest data available, foreign traders have already taken away US $13 billion from Indian market whereas by this time last year, they have pumped in US $17 billion. The pressure on the Rupee increased manifold over last couple of days due to high demand by oil companies who are scheduled to pay import bills at this time of the year. These factors made the Rupee very weak as there is very little supply of the greenback in the forex market. Market analysts and forex traders are speculating that it might slip further and cross Rs. 52 per US dollar mark during next few weeks.

On the other hand the Indian government continues to put up a brave face and is trying its best to ward off serious damages to the economy despite projections of lower growth rate. In its latest report the Center for Monitoring Indian Economy (CMIE) has put the rate of growth at 8% this year. But other agencies put the figure between 6.5 to 7 percent. Indian Finance Minister P Chidambaram said the government is taking more measures in the right direction and asked industries and service providers to cut prices during his speech at the concluding day of Indian Economic Forum, recently held at Delhi. He said -

“The classic response to demand slowdown is to cut prices for the short term ..”

According to him, price cuts will fuel domestic demand and improve sales thereby making balance sheets healthy. He told industry leaders that while banks are ready to lend money, consumers are nervous and are not ready to pay the current price. But CEOs are not impressed by government’s suggestion. They think that the interest rate must fall further before they can think of price cuts .

On another note, the government has announced some protectionist measure to shield local industries. It has re-imposed import duties on certain products including steel and soybean oil. It is also considering of lowering excise duties to give some relief to the industry.

Everybody knows Indian infrastructure is in tatters and government has taken this sector as its vehicle to pump in more money in the market. It is planning to double the stimulus package to US $10.75 billion and wants to work with the private sector very closely in this regard. Read the rest of this entry »