India’s stimulus package

Finally it’s here
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. Of this, infrastructure spending to the tune of Rs 200 bn over the next four months is on the cards. Central valued added tax has been cut by 4% across the board, other than valued added tax. Labour intensive exports such as textiles will receive sops. Small scale industries will be eligible for funding without collateral to the tune of Rs 10 m per entity.

The reaction to the package, has however, been lukewarm from the industry, which was expecting an even larger package. Although the government has not ruled further steps, it operates under severe fiscal constraints. It may be noted that the Rs 320 bn push will nearly double India’s fiscal deficit from an earlier projected 2.5% to 5% by the end of FY09. When viewed in combination with the RBI’s actions, we believe the effort definitely points towards the right direction. In fact, public sector banks are likely to announce measures to support home loans up to of Rs 2 m.

Obama will spend too...
It is not just China and India which plan to spend their way out of a slowing economy. The US, where the situation is much graver, has plans of its own. As per a leading business daily, President elect Barack Obama has said he will make the single largest new investment in roads, bridges and public buildings since the Eisenhower administration’s interstate highway program. While doing so, he intends to keep a close eye on results rather than just throwing money at the problem. Those states which do not use the money quickly stand to lose their share.

The thrust of his program will be towards aiding 2.5 m jobs. This is not surprising given that November 2008 witnessed the biggest decline in US jobs in 34 years. While a healthy US economy benefits global commerce including India, the focus on job losses is likely to darken the clouds building up on the poster child of India’s growth story - IT.