Government Announces Fiscal Stimulus Package of US$4.1 billion

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Dec. 8 – The government of India on Sunday announced a fiscal stimulus package that was even better than expected. The stimulus package increased planned expenditure by Rs 20,000 crore (US$4.1billion), a cut of 4 percent in excise duties across the board and interest rate cuts on loans for infrastructure and exports. The increased planned expenditure means that the Indian government would be spending Rs 300,000 crore (US$60 billion) under plan and non-plan expenditure in the next four months of the current fiscal. This includes Rs 280,000 crore (US$56 billion), provided in the budget but not spent so far. The fiscal stimulus package as promised also boosts the small and medium scale industries, textiles and infrastructure.

Announcing the stimulus, India's planning Commissioner Montek Singh Ahluwalia said the package could lead to a higher fiscal deficit. "The idea is to make sure money is spent (on infrastructure) for growth. Maybe, there will be more (government) borrowing. It will be mechanical to stick to the budget estimate (of deficit) when you need to stimulate growth. There is global slowdown. Our economy is in better shape than many others… we are still looking at achieving 7 percent growth rate… anything over 6.5 percent I would say is very good," he told the Times of India.

The reduction in excise duties applies to all manufactured goods except petroleum and those where the current rate is less than 4 percent. The government is hoping manufacturers pass the benefit down to consumers reducing prices and stimulating growth. The government's decision to cut excise duty by 4 percent will also impact imported goods, since the countervailing duty applicable to them will come down by the same amount. The 4 percent cut is estimated to cost the government Rs 8,700 crore (US$1.8 billion) by way of foregone revenues. If demand rise, the revenue loss would be smaller since what the government would lose by way of cutting duty it would make up through larger volumes.

A cut in excise duties is also expected to spur growth in the automobiles and cement sectors, considered to be barometers of the country’s manufacturing activity. These, coupled with a petrol and diesel price cut by Rs 5 and Rs 3 per litre respectively on Friday, and an interest rate cut by the Reserve Bank of India on Saturday, are aimed at further boosting economic growth.