Following on the heels of the monetary policy measures announced by the Reserve Bank on Saturday, the government on Sunday proposed a series of fiscal measures intended to provide a boost to the slowing economy as well as address the needs of some particularly vulnerable sectors. In its totality, the announcement is quite modest; a package of about 0.6 per cent of GDP is not going to set the Yamuna on fire; certainly, it pales in comparison with what was done some weeks ago through the supplementary demands for grants, which totaled Rs 2,37,000 crore or over 4 per cent of GDP. Much of that went to finance the Pay Commission award, the farm loan write-offs and the then burgeoning fuel and fertiliser subsidies, the need for which has almost disappeared as prices have plummeted. Sunday’s announcement, therefore, needs to be seen more as a topping-up exercise, with some major initiatives like the excise duty cut, but not much extra resource punch.
The significant component of the fiscal package is the virtually across-the-board reduction in the central excise duty (Cenvat) rates by 4 percentage points. This should make cheaper a whole range of products, from cars and two-wheelers to steel and appliances, all of which are experiencing a slowdown in demand. The fact that the duty reductions are time-bound until March 31, 2009, will act as an inducement to buy sooner rather than later. However, for items that many consumers would like to finance, the continuing reluctance of banks to lend may come in the way of spending increases. Also, consumers worried about falling incomes or job loss may choose to keep their money in the bank and not spend till the uncertainty is over. The main argument in favour of this measure is the fact that it takes effect immediately. Steps that are dependent on increased expenditure take more time to implement, thereby diminishing the credibility and the immediate impact of the package.
The licence to the newly formed India Infrastructure Finance Corporation (IIFCL) to issue tax-free bonds provides a way for banks, otherwise reluctant lenders, to inject some resources into infrastructure projects through this alternative channel. There is also a proposal to raise plan expenditure by Rs. 20,000 crore but this needs Parliamentary approval and in any case it is not certain that the government will be able to spend the money before the year runs out.
Some of the sectoral initiatives appear more cosmetic than functional. For example, exports are likely to remain in the doldrums until the US and European economies show signs of recovery. Nothing the Indian government does can offset that. On the other hand, the lifeline that has been provided to small and medium enterprises through SIDBI may help to see some units survive through bad times as long as these don’t persist for too long. Overall, the measures do provide reasonably credible support to the economy, helping to make the landing a bit softer than it would otherwise have been. Its impact on the deficit is unlikely to be very significant, particularly as the additional subsidy bill is expected to be insignificant for the rest of the year. However, it may be significant that Montek Ahluwalia was the principal spokesperson for the government in announcing the package. He is known to have supported a relaxation of the adherence to the fiscal responsibility milestones, to which Mr Chidambaram was more committed, at least until this year. As in other parts of the world, fiscal responsibility will take a back seat as governments scurry to deal with the economic crisis.