Second Stimulus - RBI's Second Booster Dose

In a bid to give another fillip to reeling Indian economy the Indian government has announced the second stimulus package on January 2, 2009 to put more liquidity into the system. In this package again there is a combined prescription of monetary as well as the fiscal measures that are supposed to give support to those sectors, which are affected most in the current meltdown.

RBI’s Booster Dose
At first the RBI has put shot in the arm by slashing cash reserve ratio (CRR) by 50 basis points to bring it to 5 per cent. This measure will infuse Rs. 20000 crore in to the banking system. On the other hand the apex bank has again cut repo rate by 100 basis points and reverse repo rate was also slashed by 100 basis points to bring it to 4 per cent, lowest level ever. This could be an encouraging news for the real estate developers as well as corporate borrowers as now banks may cut their interest rates. But industrialists aren’t very encouraged by these announcements. We have to see whether these actions of RBI will have any impact on the ground realities i.e. persuade banks to cut their interest rates and to give easy finance,” says LK Jain, CMD, Lakshmi Precision Screws. “It is not really happening since RBI has started taking steps,” he adds. After the announcement by RBI, banks like the Union Bank of India and Allahabad Bank have swiftly announced cutting of deposit as well as prime lending rates.

Government’s Therapy
On the other hand, announcing the second stimulus package, hoping that the Indian economy sustains the global financial crises with success, the Government liberalised various rules and regulations that will up liquidity and give a boost to spending and investment.

Accepting the fact that the 2009 will be a difficult year for the world, Planning Commission Deputy Chairman Montek Singh Ahluwalia said that the initiatives taken by the government were to ensure that there are no impediments to the Indian economic growth. But he vehemently made it clear that this is the last stimulus which the government is giving.

In its bid to improve liquidity to Non-Banking Finance Companies (NBFC), an SPV will be designated to provide liquidity support against investment grade paper to NBFCs fulfilling certain conditions. The scale of liquidity potentially available through this window is Rs.25,000 crore. In addition to this various other measures have been taken to hike credit availability, which includes removal of interest ceiling on external commercial borrowings and jacking up foreign institutional investment in the domestic corporate debt market from $6 billion to $15 billion.[PAGE BREAK]

The Government has also announced that an arrangement will be worked out with the leading public sector banks to provide a line of credit to NBFCs specifically for purchase of commercial vehicles. The auto industry has appreciated this move as 95 per cent of the commercial vehicles in India are financed. “The automobile industry really wants that the availability of credit to commercial vehicles would improve as due to finance crunch today only around 60 per cent of the vehicles are able to get finance. But we really have to see whether this move will change the position on the ground level,” says Mr. Dilip Chenoy, Director General, SIAM.

Another major booster has been given in the case of the India Infrastructure Finance Company (IIFCL). As IIFCL has already been authorized to raise Rs 10,000 crore through tax-free bonds by March 31, 2009 for refinancing bank lending of longer maturity to eligible infrastructure bid based PPP projects, it will be accessing the market for raising the first tranche of the amount. This fund will mainly go to highways and port projects amounting an investment to the tune of about Rs 25,000 crore. To fund additional projects of about Rs 75,000 crore at competitive rates over the next 18 months, the government has authorised  IIFCL to access in tranches an additional Rs 30,000 crore by way of tax-free bonds once funds raised in the current year are effectively utilized. Experts feel that this has a long-term impact in the times to come on the economy.

In the first package, guarantee cover on loans under Credit Guarantee Scheme for micro and small enterprises was extended by the government from Rs 50 lakh to Rs 1 crore with a guarantee cover of 50 per cent. In order to enhance flow of credit to micro enterprises, the government has further increased the guarantee cover extended by Credit Guarantee Fund Trust to 85 per cent for credit facility upto Rs 5 lakh. This will benefit about 84 per cent of the total number of accounts accorded guarantee cover. In an effort to boost the ability to raise funds of the state governments, they are allowed to borrow Rs. 3000 crore more from the market. Also the public sector banks will be given Rs. 20000 crore over the next two years so that they can lend roughly 10 times as much additionally.