The Third Stimulus Package

The Indian Govt has announced a slew of indirect tax concessions to bolster sagging demand for industrial goods and services. The stimulus includes the reduction of the excise duty rate to 8 per cent from the existing 10 per cent for sectors such as auto, steel, consumer durables, FMCG, and IT hardware & peripherals; (about 96 per cent of the country’s excise revenues hitherto came under the 14 per cent rate, which was recently lowered to 10 per cent and now to 8 per cent.) Also, excise duty on bulk cement has been reduced; bulk cement prices may be reduced by Rs.4 per 50-kgs. Service tax rate on taxable services have been brought down from 12 per cent to 10 per cent, so utility services may cost less, telecom, hospitality, tourism and aviation sectors should lower charges. The tax concessions would entail revenue sacrifice to the tune of Rs.30,000 crore (in a financial year) and has not been factored in the Budget estimates for 2009-10.
Standard & Poor’s (S&P) changed its outlook on India’s long-term sovereign credit rating from stable to negative. This outcome is expected given the slowdown in growth and rising fiscal deficit. In fact, the global credit rating agency reasoned that the revision in outlook reflects its view that India’s fiscal position has deteriorated to a level that is unsustainable in the medium term. S&P, however, affirmed its ‘BBB-’ long-term and ‘A-3’ short-term sovereign credit ratings on India.

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To Dr. Jalal Alamgir

Thanks for joining our blog. Your concerns are indeed well placed. Year 2009 or at least the first half of fiscal 2009-10 is going to be a difficult phase for the Indian economy. To emphasize the problems recent data on the domestic manufacturing sector which is the second largest employment generator after agriculture shows that —of the 96 manufacturing segments covered under the CII-Ascon survey, 32 recorded a negative growth.
The worst hit segments include fertiliser, polymers, steel, pig iron, motor starters, castings, textile machinery, distribution transformer, HCV's, LCVs, rubber footwear and auto cycle tubes. These numbers could indeed worsen in the next 2/3 quarters.
However, as you know, the government and the central bank have acted several times and are continuously monitoring the situation. The consequent high fiscal deficit should not hamper the flow of foreign investments, according to the Deputy Chairman of the Planning Commission, as high fiscal deficit due to the current economic downturn is a global phenomenon and not particular to India. The positives are: despite slowing down in the recent months as rightly pointed out by you, FDI has increased 75% in the current calendar year and 90% in the current fiscal year (over the same period, till November 2008); for 2008-09 the Indian economy will possibly turn in the second-fastest growth rate in the world at 7.1%, after China’s 8%, keeping India as an attractive destination for new FII and FDI flows; the February 16 interim budget is expected to contain more spending plans to support the economy for the first four months of the next fiscal; interest rates may be reduced further keeping alive the FII flows to the Indian debt market, which has indeed played an important role during the equity market meltdown; PSBs have reduced their lending rates to encourage industry and particularly the real estate sector. So as and when the global or even US downturn shows signs of bottoming out, India should recover and recover faster than many other economies. The political environment is not likely to cause divergence from the growth orientation of India’s economic policies.
For detailed FDI data see
www.ecofin-surge.co.in/database.html

The financial crisis has triggered a larger than expected fall in world trade growth according to the WTO; Global trade which had grown 8.5% in 2006, slowed to 5.5% in 2007 and is estimated to be down to 4.0% in 2008. Growth in dollar terms exceeded 20% in the first half of 2008, started contracting in the third quarter and turned negative in November. Currency valuations and commodity price rises inflated growth in value terms in the first half, and also accentuated the decline in the second half of 2008.

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US consumer spending slid for an unprecedented sixth straight month in December, feeding the already painful recession as households opted to save rather than buy. The 1 per cent drop in consumer spending, the economy's key driver, means little help in sight for struggling retailers, homebuilders and automakers. The Institute for Supply Management's benchmark factory activity index rose to 35.6 in January from 32.9 in December; however, this may not yet be the beginning of a recovery.

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