India announces incentives, tax cuts to boost economy (Roundup)

Dec 7, 2008, 12:08 GMT

New Delhi - The Indian government Sunday announced a fiscal stimulation package aimed at boosting industrial sectors which have been affected by the global economic recession.

The government would seek additional plan expenditure of 200 billion rupees (4 billion dollars) for the current year, a release from the prime minister's office said.

'The total spending programme in the balance four months of the current fiscal year, taking plan and non-plan expenditure together is expected to be 300,000 crore rupees (61 billion dollars),' the release added. A crore is a Hindi language-based term for a figure of ten million.

India's financial year runs from April to March.

The package, which is a combination of incentives and tax reductions, targets labour intensive export industries, realty, infrastructure and to a lesser extent the automobile industry.

An across-the board cut of 4 per cent in a central excise tax (cenvat) was announced on all products other than petroleum where the current rate is already less.

The measures to support labour-intensive export industry included an interest reduction on pre and post-shipment credit, export incentive schemes worth 3.5 billion rupees and refund of duties and service taxes.

The sectors mentioned were textiles, including handlooms, carpets and handicrafts, leather, gems and jewellery and marine products.

All these industries have been hard hit by the shrinking global market and lay-offs have been reported from textile units in western Gujarat and handicraft units across the country.

The release said the RBI would shortly put in place a refinance facility worth 40 billion rupees for the housing sector and a package for home loan borrowers would follow.

The package includes an a refinance facility for small and medium industries announced by the country's federal bank on Saturday as this sector was critical for employment genration, the release said.

Infrastructure projects in the public-private partnership mode may face difficulties in the current recession and the apex state-run financing company was authorized to raise 100 billion rupees through tax-free bonds by March 2009.

It was also announced that government departments, that run a huge fleet of vehicles, would be allowed to replace them within allowed budget relaxing current economy bars.

The Reserve Bank of India announced a cut of one percentage point for key lending rates on Saturday, signalling banks to lower interest rates to increase cash flow in the economy.

Indian banks have not responded yet to two rate cuts by RBI and the government sent out a strong message asking it to lower currently high interest rates.

'The banks are being encouraged to counter what might otherwise become self-fulfilling negative expectations by enhanced lending to support economic activity,' the announcement from the prime minister's office said.

The release said the government had consciously allowed the fiscal deficit to expand beyond the original targeted level in recognition of the need for stimulus to increase liquidity and arrest slowing economic growth.

'The government is keeping a close watch on the evolving economic situation and will not hesitate to take any additional steps that may be needed to counter recessionary trends and maintain pace of economic activity,' the release added.

Industry welcomed the measures saying it was a step in the right direction but not large enough.

'The cenvat cut is a very good step. We had not expected such a sharp cut. We hope as costs reduce, manufacturing companies will be able to pass on some of the benefit to consumers adding to the growth process from the demand side and the supply side,' said Amit Mitra, secretary general of the apex business chamber FICCI.

'We hope this is the first tranche and more needs to follow,' he added.