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Perhaps the terrorist attacks on Mumbai had something to do with galvanising the government as over the weekend it administered three successive booster shots to a dispirited economy. On Friday, petrol and diesel prices were trimmed modestly in comparison to the steep decline in world crude prices by a third, from $150 per barrel barely two months ago. On Saturday, the RBI took centre-stage with a one per cent cut in its key rates — the repo rate to 6.5 per cent and the reverse repo rate, trimmed for the first time since 2003, dropping to 5 per cent — and a slew of other measures chiefly aimed at boosting credit to real estate and small and medium enterprises and helping corporates reduce their external debt burden. And finally, on Sunday, the Prime Minster’s Office announced the much-awaited fiscal stimulus, that carries an unprecedented 4 percentage point across-the-board cut in Cenvat that should revive the spirits of manufacturers of every hue. For the first time in the recent past, policymakers are acting in concert; but their performance does not end with the bouquet of announcements; it has just begun.

The fuel price cut is the easiest part; with global prices softening to a third of September prices of around $150 per barrel and inflation dipping to around 8 per cent, there is room for further cuts, especially if they stimulate cost reductions. The repo rate cut will drive down deposit rates undoubtedly but lending rates too should follow southwards. The central bank has enhanced funding for SIDBI’s refinancing facilities for SMEs and for housing through the NHB. Banks can also claim priority status for funding housing finance companies that lend Rs 20 lakh for housing. With the lower reverse repo rate, banks ought to lend more generously, but in an economy losing steam, they will still be hesitant. So the stimulus package has to spur investment growth to revive consumer demand.

The most important element of the PMO’s package, therefore, is the additional Plan expenditure of Rs 20,000 crore. Along with the thrust on full utilisation of funds for existing projects, this is at the heart of the counter-cyclical stimulus; it is also the most vulnerable to failure, given the track record of project completion. That weakness could be offset by the jump-start that infrastructure projects could get with increased refinance facilities for long-term lending by banks through the India Infrastructure Finance Company Limited that will be authorised to raise Rs 10,000 crore through tax-free bonds. The fiscal packages are along expected lines for exporters. On balance, the Government has staked its reputation for fiscal balance on a growth agenda; it has to make sure that agenda gets off the ground.

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