BOOSTER REQUIRED – ECONOMICAL AND PSYCHOLOGICAL

By | December 3, 2008

Something is required to lift up the spirits. The terror attacks have left everyone wounded, so much so that it has taken over, at least for now, the entire spectrum away from the world recession knocking at our doors and the impact of the ongoing economic slowdown already making its presence felt in India.

Accountability and responsibility from our politicians would be hard to come by. After Shivraj Patil and R.R.Patil, neither any heads have rolled nor have any netas resignation been accepted. And probably hoping to shift this onus and to give the much needed kick start to the economy, the new FM and also the PM of our country, Manmohan Singh is working on a “booster” package. A committee working on the economic crisis has mooted a new plan which amongst a lot of things, proposes to set up a special infrastructure fund, provide interest subsidy for housing and export-dependent sectors like textiles, handicrafts and leather. The package also includes monetary measures, prime amongst which are interest rate cuts.

Improving credit off take and the overall liquidity scenario in the country would go a long way in rectifying the situation. High on the agenda is a cut in the repo and reverse repo rates which determines rates at which RBI accepts and lends to the other banks. The news is that RBI is flush with funds, with deposits coming in from the various commercial banks. Once the reverse repo rates are made more attractive and the repo rates – rates at which RBI will lend to the commercial banks is also made more attractive, the current situation of liquidity crunch is expected to get a breather. There is money in the system but no one wants to just lend and it is this which the Govt should be aiming at resolving.

News is that repo rate might be reduced by 150 basis points, which is currently at 7.5% and the reverse repo rates by a 200 basis-point cut, which is at 6% currently. News of brining down the CRR to 5-4.5% from the present 5.5% is also on the cards. This is expected to infuse an adrenalin rush of around Rs.60,000 crore into the system.

The Govt is planning to give impetus to infrastructure development by building more roads, ports, airports, bridges. This in turn is expected to give fillip to demand for cement, steel and all the other sectors which provide materials to build the infrastructure.

Another fiscal measure, aimed specifically at boosting the realty sector is providing funds to the National Housing Bank to finance small housing. It is also looking at the option of providing funds to NBFCs to finance infrastructure projects.

There is also talk of interest subvention. What does that mean? Interest subvention is when the Government steps in by picking up a part of the interest burden. The PMs panel is looking at interest rate subvention in housing loans and for the export oriented units. Exports declined 12% in October on a year-to-year basis to touch $12.8 billion, due to a severe demand slowdown in the US and Europe.

Another fiscal measure includes providing credit to the hardest hit sectors like textiles, leather, automobiles and handicrafts.

On the anvil are also import duty cuts, especially for auto, engineering and metals.

A slew of such measures are expected to be announced on Saturday. Manmohan Singh is known more for his skills for being a financial wizard rather than a politician. Maybe now its time for him to once again show his financial wizardry, which in turn could actually do some damage control to his image as a politician? And if he really shows some spine and takes those accused and responsible for the terror attacks to task, then maybe, he could actually save his party from a complete routing defeat in the coming elections.

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