The government today slashed Central value added tax (Cenvat) by four percentage points across the board to boost demand and announced Rs 20,000 crore additional non-plan expenditure as part of a much-anticipated package to stimulate the economy hit hard by the global financial crisis.
The 10-point package — part of a coordinated effort involving the Reserve Bank of India that slashed key lending rates yesterday — targets infrastructure, exports, housing, auto and small and medium industries through at least Rs 30,000 crore worth of additional funding, duty cuts and guarantees.
The cut in excise duties will mean a revenue loss of Rs 8,700 crore for the government in the current fiscal. The reduction in excise duty is valid only till March 31, 2009. The extra spending will increase the fiscal deficit by around 0.55 per cent of GDP in the current fiscal.
The government has already received parliamentary approval for an additional spending of around Rs 1,05,000 crore in the current fiscal to cover the cost of fertiliser subsidies, a higher outlay on government salaries mandated by the Pay Commission and a farm debt waiver scheme. This alone was expected to increase the fiscal deficit by 1.99 per cent of Gross Domestic Product (GDP), the sum of goods and services produced in the economy.
The fiscal deficit is now expected to cross 5 per cent in 2008-09, more than double the budget estimate of 2.5 per cent, confirming former Finance Minister P Chidambaram's assertion that the deficit targets under a fiscal responsibility law would be deferred. It will also be more than the fiscal deficit of 4.5 per cent when the BJP-led NDA alliance presented its last budget in 2003-04.
The excise duty cuts will also bring down the countervailing duties, which are part of the import duty structure and pegged to Cenvat. This in turn could add to revenue losses, an estimate of which was not immediately available.
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“The aim of the additional spending is to revive the confidence in the economy,” Montek Singh Ahluwalia, deputy chairman of the Planning Commission, told reporters. After three years of 9 per cent growth, the Indian economy is expected to grow between 7 and 7.5 per cent this year.
Today’s package, which has drawn mixed reactions from industry, was drawn up by a panel chaired by Prime Minister Manmohan Singh, who took charge as finance minister last week after incumbent P Chidambaram was shifted to home following the terror attacks in Mumbai. Other members include RBI governor D Subbarao, Chidambaram, Ahluwalia and Trade and Commerce Minister Kamal Nath.
Economists said the government has adopted a two-pronged strategy to tackle the slowdown. First, it wanted to spend in projects or schemes that can be executed quickly. Secondly, it has provided concessions for distressed sectors like textiles and leather.
“The Cenvat cut is the most significant thing as this will have an immediate effect in reviving demand in the economy,” said Subir Gokarn, economist with Standard & Poor’s, a ratings and advisory firm.
Unlike previous occasions when a cut in excise duties did not result in revenue losses because of higher demand, Gokarn said there would some loss given the current economic situation.
D K Joshi, economist with ratings agency Crisil Ltd, said, “The government is stepping in as creators of demand,” adding that the government did not have much room to spend.
Exporters unlikely to benefit: Experts said the fiscal stimulus combined with the central bank’s announcement on Saturday would revive domestic demand, but exporters are unlikely to benefit as their target markets are in recession and other exporting countries, too, have announced similar measures.
“Beggars can’t be choosers, at least we have something,” said Ganesh Kumar Gupta, President, Federation of Indian Export Organisations (FIEO).
While the government ensured that labour-intensive exporters can access cheap loans, it has promised back-up guarantee to the Export Credit Guarantee Corporation (ECGC), which is likely to ensure that banks do not deny loans to produce goods for overseas sales on grounds that the destination markets are risky.
The series of tax benefits to exporters is expected to help them lower costs incurred on doing business with overseas clients through agents.
The government, however, said it may review these measures and provide additional concessions. “The committee of secretaries will meet regularly to assess the situation and also keep meeting industry to understand its views,” said Commerce Secretary Gopal Pillai to a news channel.
The measures come at a time when export growth dipped 12.2 per cent in October and against growing fears that exports in 2008-09 would not be more than $180 billion, short of the $200 billion target.
The additional allocations to export incentive schemes like Focus Markets are also intended to act as incentives to exporters to exports certain products to new and emerging export destinations in Africa, Latin America and former USSR countries. “There is a need to export to newer markets and the measures will help exporters to do so,” Pillai said.
IIFCL as financial intermediator: The fiscal package has also created a financial intermediator in India Infrastructure Finance Company Ltd (IIFCL). The state-owned firm, which was incorporated in January 2006 to provide long-term finance to infrastructure projects, will issue tax-free bonds for Rs 10,000 crore that will be used to refinance banks that are lending for such projects of longer maturity.
“This scheme will put more money from the banks. The size is not important. Once a few projects start, the momentum will pick up,” said Gokarn.
MSMEs unhappy: Medium, small and micro enterprises (MSMEs), which contribute more than a third of industrial production and employ 31 million people, are unhappy with the proposals for their sector, saying the measures are incremental and not substantial.
“Agencies like SIDBI, for which the RBI has announced a refinance facility, are small fry in the credit delivery system to MSMEs,” said Anil Bharadwaj, secretary general of Federation of Indian Micro, Small and Medium Enterprises (FISME).
| 'A CONTRA-CYCLICAL THRUST' (Key elements of the government’s stimulus package) |
| * Government to seek authorisation for additional plan expenditure of up to Rs 20,000 crore in the current year. Steps are also being taken to ensure full utilisation of funds already provided. |
| * Cenvat cut 4 percentage points on all products for the remainder of the financial year (other than petroleum and those products for which the current rate is less than 4%) |
| FOR EXPORTS |
| * 2% interest rate subvention up to March 31, 2009 in pre-and post-shipment credit for labour-intensive exports for textiles (including handlooms, carpets and handicrafts), leather, gems & jewellery, marine products and small and medium industries subject to minimum rate of interest of 7 per cent a year |
| * Additional funds of Rs 1,100 crore will be provided to ensure full refund of Terminal Excise duty/CST. |
| * Rs 350 crore additional allocation for export incentive schemes |
| * Government back-up guarantee for ECGC of Rs 350 crore for exports to difficult markets/products |
| * Service tax refund on foreign agent commissions of up to 10% of FOB value of exports |
| * Service tax refund on output services while availing of benefits under the duty drawback scheme |
| FOR HOUSING |
| * Public sector banks will shortly announce a package for home loan borrowers up to Rs 20 lakh |
| FOR MEDIUM, SMALL AND MICRO-ENTERPRISES (MSMES) |
| * Guarantee cover under Credit Guarantee Scheme for Micro and Small enterprises on loans will be extended from Rs 50 lakh to Rs 1 crore with a guarantee cover of 50% |
| * Lock-in period for loans covered under the existing credit guarantee scheme will be reduced from 24 to 18 months |
| * Government to issue an advisory to central public sector enterprises and request state public sector enterprises to ensure prompt payment of bills of MSMEs For Textiles |
| * Additional allocation of Rs 1,400 crore to clear the entire backlog in the TUF scheme |
| * All handicrafts will be included under Vishesh Krishi & Gram Udyog Yojana |
| FOR INFRASTRUCTURE |
| * India Infrastructure Finance Company Limited (IIFCL) to raise Rs 10,000 crore through tax-free bonds by March 31, 2009, to refinance bank lending of longer maturity to eligible infrastructure projects, particularly in highways and ports |
| * Depending on need, IIFCL will be permitted to raise further resources by issue of such bonds |
| OTHERS |
| * Government departments will be allowed to take up replacement of government vehicles within the allowed budget, in relaxation of economy instructions |
| * Import duty on naphtha for use in the power sector eliminated |
| * Export duty on iron ore fines eliminated and on lumps reduced to 5% |
Housing package awaited: Though specific measures were not announced, Ahluwalia said the public sector banks would soon come up with a package for home loan borrowers in two categories: up to Rs 5 lakh and between Rs 5 lakh and Rs 20 lakh, adding that, “there is a large unmet need for housing in the country, especially for middle and low income groups”.
Under this package, state-owned banks are expected to charge borrowers lower than the prevailing market rate in these two categories. With interest costs increasing sharply in the last eight months and home buyers postponing purchases, realty players have requested the government to take measures to revive demand in this sector which has a spin-off effect on other industries like steel and cement.