Second Stimulus Package - just a drop in the ocean

SECOND STIMULUS PACKAGE: which way will the scale swing now?

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Bikky Khosla | 06 Jan, 2009
All rational optimism of starting the year on a high note dried up soon after the government announced the second stimulus package recently. The fact that against the industry's expectations of around a Rs. 1 trillion package, the sum of Rs. 200 billion is just a drop in the ocean of the trillion-dollar Indian economy. Undoubtedly, the second stimulus package is too little to be recognized as a booster dose for the ailing industry.

For instance, the export community is facing a triple whammy of aggressive pricing by China, lack of bank finance and the real threat of cancellation of orders. And the stimulus package had nothing much to offer by way of countering these challenges.

The requests of the export community to increase 3 percent in Drawback and DEPB and additional 2 percent interest subvention were sadly overlooked. The demand for an income tax holiday for five years and two years' moratorium of terms loans were ignored too. I strongly believe that the refusal of a moratorium on repayment of term loans is bound to lead to extensive loan defaults and can have a serious impact on not only the industry but also on the banking sector.

Interestingly the extension of DEPB scheme up to December 31 as was announced in the second stimulus package is just a routine announcement made to align with customs notification. I feel these changes made in DEPB and drawback rates on some products will not have much impact.

However, the second stimulus package had a couple of positives too. The cut of 4 percent in ad-valorem Cenvat rate and removal of the ceiling on external commercial borrowings (ECB) are measures in the right direction. No doubt the additional Rs. 20,000 crore infused into the system through the CRR cut will definitely leave more liquidity with the banks to help the industry boost its sagging growth and restore business confidence.

Having said that however, implementation will be the keyword now. Authorities need to ensure that these announcements don't just remain on paper. Also, it is important for banks to come forward and lend to MSMEs rather than invest money in government securities as they have been doing earlier.