In a 2-part Series, we shall cover the following:
1. What is stimulus, and throw some light on stimulus announced in 2008.
2. Taking a cue from 2008, what we can expect this time.
Q. What is Financial Stimulus package?
During a downturn, governments can step in with a set of measures to reinvigorate the economy. Most often these involve increasing liquidity in the system, increased spending by the government to increase employment and general demand in the economy, which acts as a signal for companies to increase production, which in turn will lead to more hiring and so on through the virtuous economic cycle.
Q. Is it so simple?
The government could lower taxes in order to put more money in consumer’s hands so that they spend more. The government will have to wait till the next budget to announce a cut in Income Tax, and will thus go to lowering GST to reduce cost of goods. Also, in order to increase spending the government has to borrow money, since its tax revenues cannot meet the shortfall. However, a government borrowing reduces the pool of money available for companies to borrow, and raises their interest costs. It is also argued that deficit spending by the government increases inflation, which in turn hurts the economy.
Q. Has this been done in past?
Yes in 2008 – 09. The Indian economy, which was widely believed to be less integrated with the global economy, felt the aftermath of the financial crisis emanating from the US rather quickly. First the crisis appeared as a crash in the stock market following the steady withdrawal of funds by the Foreign Institutional Investors. This in turn led to a credit crunch giving rise to soaring interest rates especially in the money market. As International Funds got dried up, many Indian corporate firms turned to the domestic market for their credit needs, thus compounding the problem. Sectors which were exposed to the global market to a high degree such as civil aviation, textiles, leather, gems and jewellery and so on were suddenly faced with a decline in demand that led to job loss and/or adjustments in wages and salaries. It is in this background that the Government of India came out with two stimulus packages.
Q. What did the government do then?
The Government bought in 2 Financial Stimulus Packages (From Dec 2008 to January 2009). These packages tried to ease availability of money to different categories of borrowers and also tried at different levels to stimulate demand.
Q. Stimulus Package I (December 2008)
• Reduction in Repo Rates by 1% to bring down cost of borrowing.
• Interest subvention increased for labour intensive sectors by 2%.
• Schemes for SMEs – Increased Credit Lines.
• Incentives for Housing Loans (5 Lakhs to 20 Lakhs).
• Tax free bonds issuance of Rs 10,000 Crores to boost infra spending.
• Precipitate Infra projects worth 100,000 Crores through faster approvals.
• Cut in CENVAT by 4% to increase spending.
Q. Stimulus Package II (January 2009)
• Steps taken to increase credit for sectors, including opening up of some sectors for ECBs (which was earlier closed).
• Increased limits for FIIs to participate in Rupee denominated bonds.
• States allowed to borrow more for Capital Expenditure.
• Enhancement of Duty drawback facilities for exporters.
• Issuance of more Tax-free bonds (30,000 Crores) to boost infra spending by 75,000 Crores.
• Schemes announced to give life to commercial vehicle spending.
• Changes in Duties and CVDs in select sectors.
Q. What about now … 2020?
The Government has already announced stimulus packages and we are expected to get more in coming days. In our next report, we shall cover what we have already received and also our WISH LIST.