Booster Dose #5: the final attempt, and a weak one at that

The government is readying for elections. It has announced the final round of its fiscal stimulus package. With no signs of the measures taken till now leading to a recovery, the government is throwing everything it can at the slowdown. And, then it will leave the next government to clean up the mess –falling tax revenues, growing fiscal deficit and an economy that refuses to be kickstarted.

Here are the measures and their possible impact. Earlier, the RBI had announced a separate set of monetary measures. External commercial borrowings (ECBs): The all-in-cost ceilings on ECB have been removed for the automatic route. Earlier, the RBI prescribed a ceiling –200 basis points over LIBOR as of Oct 2008- to cover interest, fees and prepayment fees. This will mean that companies can pay whatever it takes to raise money overseas.

The state of real estate companies continues to worry the government. ECB funds can now be used for development of integrated townships. Infrastructure and real estate: Next in line are NBFCs. Those NBFCs, who exclusively deal with infrastructure financing, can now borrow under the ECB route from multilateral or bilateral financing institutions. Beneficiaries could be IDFC and possibly SREI Infrastructure Finance, though what is ‘exclusively dealing with infrastructure financing’ needs to be seen. These decisions will be reviewed after June 30, 2009.

Liquidity enhancing measures: Corporate debt market is being given a boost, with FII investment in rupee-denominated corporate bonds, being allowed up to $15bn compared to the present $6bn. NBFCs will be allowed to borrow from a Rs 25,000 crore window, against pledging eligible securities. PSU banks are going to be pushed to do their bit for the country again. They will be asked to give a line of credit to NBFCs, specifically for buying commercial vehicles. And to make companies buy trucks and buses, buyers will get 50% depreciation for vehicles purchased between January and March 2009. This will allow them to lower their tax outgo for the year, but falling profits during FY09 will dent the impact of this measure.

PSU bank credit targets are going to be revised. Obviously the revision is going to be upwards. Most PSU banks are listed entities and their shareholders should be worried about their banks being forced to lend in a bad market. RBI is not really positive about the credit environment. Banks should be free to lend when they perceive credit risk as being acceptable not because the government insists on it. Directed lending has never worked in the past.

Some other small measures to benefit small enterprises have been taken too. Exporters have got some incremental measures to help them combat the slowdown. State governments have been facing revenue shortfalls, so the central government is allowing them borrow an additional 0.5% of their gross state domestic product, for capital expenditure. That sum amounts to Rs 30,000 crore. There are some additional measures, which are to do with removal of customs duty exemptions, which will help domestic industry cope with cheaper imports.

The government will set up a committee to monitor progress of projects. This will be the last fiscal package to be announced in FY09. The government is finalising an expenditure plan for next year. It has already announced that it will provide Rs 20,000 crore for recapitalisation of public sector banks. That is to ensure their capital adequacy is maintained, which can get affected either due to growing loans or get affected by lower surpluses, especially due to non-performing assets. No prizes for guessing who will be responsible for that.

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