The Hindu Business Line : 3 booster doses: Will the economy respond?

Mumbai, Dec. 7 The timing couldn’t have been better. A dispirited economy whose financial heart was savaged by 10 youths, filled with irrational hate for people they did not know, needed comforting. First, the reshuffle in Mumbai and New Delhi and now over the weekend, a triple dose of pick-me-ups. Three days of policy initiatives never seen in recent times.

The question is: what took New Delhi so long? The fuel price cut announced on Friday is too modest given the drastic decline by a third in global crude prices from around $150 a barrel in September. Mr Murli Deora has called it an interim measure holding out the possibility of further cuts. The “pass-through” effects on the economy should help if they drop further, even if the oil companies begin to wince again at their under-recoveries. The common man will get little relief from the prices of primary articles that still average 11 per cent.

On Saturday, the RBI took the stage. Key rates were cut, the reverse repo rate for the first time in eight years. The plan remains the same: increase liquidity, goad banks to lend more, especially to the common man for housing up to Rs 20 lakh. SIDBI means to offer additional bank refinance for the small and micro-enterprises. The corporate sector can reduce its external debt through buyback of FCCBs using their rupee resources.

But, here lies the rub: their resources are slim at the moment given the tight credit markets and slim internal accruals. In any case, there is a limit of $50 million, so the small and medium enterprises may exercise the option — if they had the money. As for the large firms, they will probably wait for a better day when interest rates abroad drop to zero and/or the credit market softens. As for the repo rates, the twin cuts will release more funds but will banks lend? Certainly, many will drop deposit rates to retain margins but will they lend in this pervasive gloom?

That’s where the Prime Minster-cum-Finance Minister’s stimulus package steps into the plot.

First, the fiscal concessions; increasingly, ministries are like Washington lobbyists, clamouring for public resources; earlier, it was the Fertiliser and Chemicals Ministry that got huge increases in subsidies. Grudgingly granted, they are now viewed by the PMO as part of the “fiscal stimulus”.

Similarly, the Commerce Ministry had given notice of its intention to seek relief for exporters, hit by a worldwide recession. While other countries such as China and the East Asian trade-dependent economies scout new markets (China in Peru?), exporters of traditional goods, textiles, gems and jewellery get tax relief.

For good measure, the stimulus package throws Rs 350 crore in a market diversification effort as government guarantee for “difficult markets” through the Export Credit Guarantee Corporation (ECGC); the amount is too small for these times when all markets are difficult.

Additional Plan expenditure

The most potent medicine in the Sunday package out of the PMO is the “contra-cyclical” stimulus; an additional Plan expenditure of Rs 20,000 crore in the current year. Ideally, public expenditure in a downturn leads to private investment and eventually consumer demand. So public spending is crucial; but in India it is also wasteful. Tenth Plan power projects are yet to be completed; often funds are not utilised. The PMO statement promises “steps to ensure full utilisation of funds already provided…”

For the manufacturing sector some relief comes through the general reduction of Cenvat by four percentage points. But that is not enough. A plan to revive auto demand would have included the ministry of urban development’s suggestion for zero excise duty on buses to encourage public transportation in urban areas, most of which lack such facilities.