Government Announces Measures for stimulating the Economy

The Government has been concerned about the impact of the global financial crisis on the Indian economy and a number of steps have been taken to deal with this problem.

The first priority was to re-assure the people of the stability of the financial system in general and of the safety of bank deposits in particular. To this end, steps were taken to infuse liquidity into the banking system and also to address problems being faced by various non-bank financing companies. These steps have ensured that the financial system is functioning effectively without suffering the kind of loss of confidence experienced in the industrialised world.

Having assured stability of the system, the Government has focussed its attention on countering the impact of the global recession on India's economic growth. On the monetary side, the RBI has sought to pump sufficient liquidity into the banking system to enable bank credit to meet the expanded requirements of the economy keeping in mind the contraction in credit from non-bank sources. Banks have been provided adequate liquidity through a series of reductions in the CRR and additional flexibility in meeting the SLR requirement. Interest rate reductions have also been signalled by reductions in the repo and reverse repo rates, the most recent of which was announced on Saturday when both the repo rate and the reverse repo rate were cut by 100 basis points. Access to external commercial borrowings has also been liberalised so that borrowers capable of accessing funds from abroad are allowed to do so. The banks are being encouraged to counter what might otherwise become self-fulfilling negative expectations by enhanced lending to support economic activity.

These measures in the area of money and credit are being supplemented by fiscal measures designed to stimulate the economy. In recognition of the need for a fiscal stimulus, the government had consciously allowed the fiscal deficit to expand beyond the originally targeted level because of the loan waivers, issue of oil and fertilizer bonds and higher levels of food subsidy. In addition, the following steps are being taken:

1. Plan Expenditure:

In order to provide a contra-cyclical stimulus via plan expenditure, the Government has decided to seek authorisation for additional plan expenditure of upto Rs 20,000 crore in the current year. In addition, steps are being taken to ensure full utilisation of funds already provided, so that the pace of expenditure is maintained. 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 Rs.300,000 crore.

The economy will continue to need stimulus in 2009-2010 also and this can be achieved by ensuring a substantial increase in plan expenditure as part of the budget for next year.

2. Reduction in Cenvat:

As an immediate measure to encourage additional spending, an across-the-board cut of 4% in the ad valorem Cenvat rate will be effected for the balance part of the current financial year on all products other than petroleum and those where the current rate is less than 4%.

3. Measures to Support Exports

i) Pre and post-shipment export credit for labour intensive exports, i.e., textiles (including handlooms, carpets and handicrafts), leather, gems & jewellery, marine products and SME sector is being made more attractive by providing an interest subvention of 2 percent upto 31/3/2009 subject to minimum rate of interest of 7 percent per annum

ii) Additional funds of Rs.1100 crore will be provided to ensure full refund of Terminal Excise duty/CST.

iii) An additional allocation for export incentive schemes of Rs.350 crore will be made.

iv) Government back-up guarantee will be made available to ECGC to the extent of Rs.350 crore to enable it to provide guarantees for exports to difficult markets/products.

v) Exporters will be allowed refund of service tax on foreign agent commissions of upto 10 percent of FOB value of exports. They will also be allowed refund of service tax on output services while availing of benefits under Duty Drawback Scheme.

4. Housing

Housing is a potentially very important source of employment and demand for critical sectors and there is a large unmet need for housing in the country, especially for middle and low income groups. The Reserve Bank has announced that it will shortly put in place a refinance facility of Rs.4000 crore for the National Housing Bank. In addition, one of the areas where plan expenditure can be increased relatively easily is the Indira Awas Yojana. As a further measure of support for this sector public sector banks will shortly announce a package for borrowers of home loans in two categories: (1) upto Rs.5 lakhs and (2) Rs 5 lakh-Rs 20 lakh. This sector will be kept under a close watch and additional measures would be taken as necessary to promote an accelerated growth trajectory.

5. MSME Sector

The Government attaches the highest priority to supporting the medium, small and micro enterprises (MSMEs) sector which is critical for employment generation. To facilitate the flow of credit to MSMEs, RBI has announced a refinance facility of Rs.7000 crore for SIDBI which will be available to support incremental lending, either directly to MSMEs or indirectly via banks, NBFCs and SFCs. In addition, the following steps are being taken.

(a) To boost collateral free lending, the current guarantee cover under Credit Guarantee Scheme for Micro and Small enterprises on loans will be extended from Rs.50 lakh to Rs.1 crore with guarantee cover of 50 percent.

(b) The lock in period for loans covered under the existing credit guarantee scheme will be reduced from 24 to 18 months, to encourage banks to cover more loans under the guarantee scheme.

(c) Government will issue an advisory to Central Public Sector Enterprises and request State Public Sector Enterprises to ensure prompt payment of bills of MSMEs. Easing of credit conditions generally should help PSUs to make such payments on schedule.

6. Textiles

(a) An additional allocation of Rs.1400 crore will be made to clear the entire backlog in TUF Scheme.

(b) All items of handicrafts will be included under 'Vishesh Krishi & Gram Udyog Yojana'.

7. Infrastructure Financing

A large number of infrastructure projects are now being cleared for implementation in the Public Private Partnership mode. These projects may experience difficulty in reaching financial closure given the current uncertainties in the financial world. In order to support financing of such projects, Government has decided to authorise the India Infrastructure Finance Company Limited (IIFCL) to raise Rs.10,000 crore through tax-free bonds by 31/3/2009. These funds will be used by IIFCL to refinance bank lending of longer maturity to eligible infrastructure projects, particularly in highways and port sectors. In this way it is expected that IIFCL resources used for refinance can leverage bank financing of double the amount. Depending on need, IIFCL will be permitted to raise further resources by issue of such bonds. In particular, these initiatives will support a PPP programme of Rs.100,000 crore in the highways sector.

8. Others

(a) Government departments will be allowed to take up replacement of government vehicles within the allowed budget, in relaxation of extant economy instructions.

(b) Import Duty on Naphtha for use in the power sector will be eliminated.

(c) Export duty on iron ore fines will be eliminated and on lumps will be reduced to 5%.

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 the pace of economic activity.

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Exporters may get back benefits available earlier

The big export relief measures for which the besieged exporters are looking forward to on Saturday would largely comprise restoration of benefits already bestowed on exporters that were withdrawn in recent period such as interest subvention, due payment of arrears of terminal excise duty (TED)/Central Sales Tax (CST), services tax and higher drawback and DEPB (duty entitlement pass book) rates.

Highly-placed sources said that the export relief measures to be announced tomorrow would broadly cover these aspects so that exporters, reeling under disconcerting drop in overseas orders and high transaction cost, would be left with some flow of funds to salvage the situation.

They said that not a single service tax to exporters has been refunded by way of notification so far even though the intent has been declared widely.
Policy rates

The sources said that as the RBI is all set to announce on Saturday some cuts in policy rates with banks being asked to push down interest cost, exporters must perforce also to hold on to existing markets for which they need “a little bit of stimulus”. The sources said that once a lower policy rate is unveiled by the central bank to be followed by lower interest rate by banks, exporters would also be given an interest subvention on export finance, especially those in the labour-intensive export segment such as textiles, gems and jewellery, marine products, leather of minus 2 per cent that would cost Rs 250 crore in the next four months.

The restoration of drawback and DEPB rates from the recent cuts would cost another Rs 250 crore in the next couple of months, while there would be refund of services tax on output services and foreign exchange commission to benefit the exporters.

They said the arrears of TED/CST running to Rs 600 crore would be settled now, while the Export Credit Guarantee Corporation (ECGC) would be given a backup of Rs 350 crore to extend risk coverage to exporters. The sources said that the Commerce Ministry is worried that Indian exporters have to contend with every other country providing at least one per cent tax rebate to get export orders in a shrinking market and the least the government could do is to help them realise some of the benefits guaranteed to them under the statute.
Ministry perspective

Asked how the Commerce Ministry views the prospects for exports after the relief measures would be put in place tomorrow, the sources conceded that the department has drawn two scenarios—the most optimistic being that overall exports during the current fiscal would register a 10 per cent growth in dollar terms and the least optimistic being that there would be a decline of 4 per cent in export growth of $162 billion the country compassed during 2007-08. They said the exporters have orders only up to January next and the subsequent months would be difficult to sail through.

The sources said that a survey of 121 companies across the country and across industry revealed that job losses estimated was 65,000 in the last three m months and the prediction is that the aggregate job losses in industry due to declining exports and declining demand would be 12 lakh this year.

The sources said that even the Special Economic Zones (SEZs) have been facing difficulty in exports and in places like electronic SEZ at Santa Cruz, the zone authority has informed the officials in the Commerce Ministry that 25,000 less number of casual employees passes do not get picked up. “This is at a time when casualisation and contractualisation of labour has been the most important labour reform imperceptibly supervening in India between 1991 and 2008”, the sources quipped.

To a specific query about any move to diversify markets for exporters, the sources said that India’s exports to the United States and the European Union (EU) account for only 35 to 38 per cent with the remainder going to Africa, East Asia and Latin American countries. “That is why the Ministry has sought higher assistance for focus market and focus market schemes to help exporters send out delegation and mount trade fairs for buyer-seller interface,” the sources added.

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Global meltdown wipes out Rs 1,792-cr export orders

NEW DELHI: A government survey of the export sector has thrown up a grim picture of severe job losses and order cancellations. Senior government officials have warned of many export units closing down and thousands of jobs being lost if a bailout of exporters is not launched soon.

A survey of 125 companies by the commerce department has revealed that the companies lost export orders worth Rs 1,792 crore during August-October 2008 and were forced to lay off 65,000 workers.

The commerce department had carried out the survey to find the extent of hit exporting units had taken due to the global financial meltdown and the resulting credit squeeze and demand slowdown.

A senior official in the commerce department said that if steps to bail out exporters are not taken now, “not hundreds but thousands of units will close down within a few months”.

The exporters are suffering on many counts. While there is lower demand from foreign buyers due to recession in the Western economies, banks in India are also not willing to honour letters of credit. This is making it difficult for exporters to fulfil whatever little orders they have. In October 2008, exports growth entered the negative territory for the first time in five years, registering a fall of 12% from a year ago.

The official pointed out that the problem in the country was not of inadequate liquidity but unwillingness of banks to give loans to exporters. “We were amazed to find out that banks were actually asking some exporters not to take additional orders,” the official said.

The committee of secretaries working on the incentive package for the industry has been discussing a mechanism to ensure there is no slowdown in lending. According to the plan, to be executed by the financial services department in the finance ministry in cooperation with banks, loans made by various branches of banks will be noted and bank managers asked to explain the reason in case a slowdown is noticed. Bankers will be asked to meet SME entrepreneurs to address their problems.

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Safeguard levy to fight cheap imports

NEW DELHI: The government is examining a plan to impose safeguard, or temporary, Customs duties to help sectors such as steel and chemicals fight a surge of cheap imports, notably from China, officials say.

It has also asked the local industry to help identify products which have seen a big rise in imports in the past few months, as it looks to use all weapons in its arsenal to protect domestic manufacturers, they said.

The government has expedited anti-dumping investigations against cheap imports of a large number of items, mostly from China, and has imposed import restrictions on products used by the automobile and construction industries.

“Imposition of safeguard duties is another option for protecting the domestic industry we can explore. We are putting in place the mechanism which would allow us to take action against import surges,” a government official, who asked not to be named, said.

While anti-dumping duties are imposed if it is established that a country is exporting goods at prices lower than what it is sold for locally, safeguard duties can be imposed if there is a surge in imports leading to market disruption and serious injury to domestic industry.

Since demand in India’s traditional export markets such as the EU, US and Japan is drying up due to the global economic downturn, the government is keen to ensure the domestic industry is protected by catering to the growing domestic market. It is, therefore, exploring a variety of measures to check cheap imports.

The domestic steel industry, hit by falling international prices and imports from China, has received help from the government in the form of fast anti-dumping investigations and import curbs restricting imports of items such as seamless pipes and tubes to only actual users.

“For products where anti-dumping duties cannot be imposed, the Centre can consider imposing safeguard duties,” the official added.

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Hot-rolled coil import put under restricted list

Responding to demand made by the domestic steel industry for measures to check cheap imports from China, the government, on Friday, restricted the import of hot-rolled coils which was so far being freely imported.

This means that the item can now be imported only by actual users against licenses issued by the government and traders will no longer be allowed to import.

The move is part of the government’s effort to help the domestic industry deal with the global economic crisis and the slow-down in demand.

A notification issued by the directorate general of foreign trade (DGFT) stated that import policy for the item `hot rolled coils’ will be amended to read as "restricted" instead of free.

Federation of Indian Export Organisations (Fieo) director general said the measure would be a disincentive for imports as traders can no more bring in hot-rolled coils and supply it directly to the domestic industry. “Since only actual users will be given licenses to import, the total import is expected to go down,” he said.

According to Vinod Mittal of Ispat Industries, the government has taken a pro-active decision at an appropriate time and the move will stabilise the domestic steel industry to some extent. “We are even looking at reducing steel prices further to help consumers get better prices. We will start operating at 80% of our capacity (against 50% at present) from January onwards,” he said.

There have been apprehensions about Chinese companies dumping hot-rolled coils in the Indian market. Reports on a possible withdrawal of the 15% export duty imposed by the Chinese government on steel has made the domestic industry even more jittery.

“Since anti-dumping investigations take a long time, the effective and fast way to check cheap imports is by restricting it. This is what the government has done,” an industry source said. More than 90% of India’s steel imports is from China. The government had, earlier, withdrawn export duty on certain iron and steel products to help domestic steel producers.

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Revision of customs duties on certain items and procedural simplification in Service Tax refund to exporters

In the wake of the recent fall in the international prices of commodities and with a view to safeguard the interests of domestic producers, Government have carried out certain changes in the customs duty rates. The details of these changes are as under:

(i) Withdrawal of the full exemption from customs duty granted earlier on specified iron and steel items such as Pig iron, spiegeleisen, semi-finished products, flat products and long products. Consequently, they will be subject to a basic customs duty of 5% ad valorem.

(ii) Withdrawal of full exemption from customs duty granted earlier on crude soyabean. Consequently, crude soyabean oil will be subject to a basic customs duty of 20% ad valorem. There is no change in the import duty on refined soyabean oil.

These changes come into effect on the 18th of November, 2008. Notification No.122/2008-Customs dated 18.11.2008 has been issued in this regard.

With a view to simplify the refund based service tax exemption scheme on taxable services attributable to exports, the time limit for filing refund claims has been extended from 60 days to six months. In respect of technical testing and analysis service, the documentation required for claiming refund has been simplified. Notification No.32/2008-Service Tax dated 18.11.2008, amending notification No. 41/2007-Service Tax has been issued in this regard.

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Rupee weakens further to past 48 per dollar

MUMBAI: The Indian rupee weakened past 48 per dollar on Tuesday for the first time since January 2003 as concerns intensified about foreign fund outflows amid a global financial crisis.

At 9:03 a.m. (0333 GMT), the partially convertible rupee was at 48.01/48.02 per dollar, after falling 1.5 percent on Monday to 47.80/81.

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Rupee off 5-year low, but outflows weigh

MUMBAI: The rupee bounced off five-year lows on Wednesday after state-run banks sold dollars heavily, but concerns about capital outflows weighed on the Indian unit.

By 10:35 a.m. (0505 GMT), the partially convertible rupee was at 47.012/13 per dollar after falling to 47.2350 in opening deals, its weakest since June 2, 2003 and down 0.6 percent from the previous close of 46.95/96.

At the low, the rupee had lost 16.6 percent in 2008 making it among the worst performing Asian currencies. In 2007, the rupee had gained more than 12 percent.

"Companies, refiners, foreigners are all buying dollars," said a senior dealer at a foreign bank, who expected the rupee to trade in a broad 46.90-47.20 band on Wednesday.

He said the state-run banks, which usually act on behalf of the central bank, were the only ones selling dollars.

The central bank is watching the foreign exchange market as usual, Shyamala Gopinath, deputy governor at the Reserve Bank of India said on Wednesday.

Traders said heavy withdrawals by foreign funds from Indian shares had put pressure on the rupee, and the outlook remained grim with the spreading global financial crisis.

Foreigners have sold a net $9.3 billion of Indian shares so far in 2008, after buying a record $17.4 billion last year.

Data on Tuesday showed India's current account deficit widened sharply to $10.72 billion in the June quarter from $1.04 billion three months earlier as a sharp rise in oil prices widened the trade gap.

One-month non-deliverable forwards were at 47.23/47.33 per dollar, weaker than the onshore rate.

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Currency chaos hits importers, exporters alike

NEW DELHI: The steady depreciation of the rupee against the dollar and the unpredictable cross-currency movements in the global market have put India’s exporters and importers in a fix. While small and medium-size exporters who had not hedged their risks when the rupee was rising last year are reaping windfalls of the dollar breaching Rs 47, uncertainty about the future exchange rate is affecting their pricing decisions.

In the present situation, large and medium-sized exporters who had hedged their risks are clearly the losers. Most importers, who had not hedged their risks assuming that last year’s appreciation in the value of the rupee was here to stay, are also paying for the mistake.

With the export sops announced last year including an increase in the drawback rate and an interest rate subvention of 4% being withdrawn on October 1, exporters lament that the incentives are being removed much before they can actually reap the benefits of dollar appreciation. Industry executives met RBI governor D Subbarao on Tuesday, proposing that measures be taken in the upcoming monetary policy to increase money supply and ease the present credit squeeze.

Delhi Exporters Association president SP Agarwal told that when the dollar had fallen to Rs 39 last year and the government and many experts were predicting a further fall to Rs 33-34, a number of exporters had done forward booking at Rs 39.

“They are the ones who are suffering. FIEO director general said that at least half the country’s exporters had hedged their risks last year.

From the consumer’s point of view, precious metals like gold and silver are becoming dearer due to the weaker rupee. Since demand is going up during the festival season, the rupee depreciation has come at the wrong time. Diamond jewellery would also cost more since precious stones as well as gold are imported, trade sources said.

Edible oil is another item which would turn dearer due to depreciating rupee, as the bulk of the domestic demand is met through imports. In this case too, demand is increasing now due to the onset of the festival season.

Fertilisers, project imports and electronics would also turn dearer, trade sources said. For ultra-mega power projects, Indian companies are importing equipment worth billions of rupees.

Prompted by similar expectations of the dollar depreciating further, importers had refrained from hedging. As a result, despite international prices of oil and cereal decreasing, it is not percolating down to the Indian consumer because of the depreciating rupee, Mr Sahai said.

The sudden turnaround in the value of the dollar which has appreciated by approximately 18% in the last two quarters also has exporters confused over what price to quote for their future orders. There is a time lag of about five-six months between order booking, delivery of goods and the receipt of payment.

Mr Agarwal said that while many exporters were booking orders on the basis of dollar valued at Rs 44-45, they had their fingers firmly crossed. “We are just hoping that when we realise the payment for our orders in the summer, the dollar should not have fallen below Rs 44,” Mr Agarwal said.

While small exporters are rejoicing, the situation is becoming tougher for large IT companies which have substantial earnings in foreign currency. Though many of them have hedged, the extent of fluctuation is far higher than anticipated.

Interestingly, some exporters who want to play it safe and have an understanding with buyers, are quoting in Indian rupees. “When exporters quote in rupees, they are not affected at all by the value of the dollar,” Mr Sahai said. Some others are quoting in stable currencies depending on the region where they are trading, he added.

However, this too has its risks, as cross-currency movements are unpredictable, Mr Sahai pointed out. “While the dollar is appreciating against the Indian rupee, it is depreciating against the euro. Cross-currency movement is giving a complex picture,” he said.

Exporters claim that since they are yet to get over the losses suffered last year due to the more-than 12% depreciation in the value of the dollar, it was too early for the government to take back the sops. “When the dollar was depreciating, it took the government six months to react. But now that the situation has reversed, it is in a hurry to take them back,” Mr Agarwal said.

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Engineering goods exporters eye ASEAN market KOLKATA: On the heels of an economic crisis getting intensified in the US and Europe, Indian engineering

KOLKATA: On the heels of an economic crisis getting intensified in the US and Europe, Indian engineering goods exporters are looking towards the A sean for driving up exports from the country.

The exporters' body is especially counting on the potential of expanding trade with the region since it accounts for nearly 30% of India's engineering goods exports.

Countries like Malaysia, Indonesia and Singapore in particular hold immense potential. Currently, the ASEAN trade bloc is the third-largest market in Indian engineering goods, behind the US and Europe.

Engineering goods exporters are more upbeat about growth prospects in the ASEAN after holding the India Engineering Export Exhibition (Indee) recently in the Malaysian capital, Kuala Lumpur.

At Indee, which was organised by EEPC India, in collaboration with the federal government of Malaysia and leading chambers, Indian compnies received export orders worth nearly $ 0.20 million and trade enquiries worth $5 million.

In course of buyers and sellers meets at Indee, two Malaysian companies evinced interest in entering into joint ventures with Indian companies for manufacturing mechanical seals and solar panels.

EEPC India chairman Rakesh Shah said with talks going on between the countries for signing the Comprehensive Economic Cooperation Agreement (CECA), Kuala Lumpur has been chosen the first venue for export promotion among the ASEAN countries.

Besides the prposed CECA, trade between India and Malaysia is expected to get a boost in the wake of India signing a free trade agreement with the ASEAN trade bloc. Bilateral trade between India and Malaysia has grown 41% to $4.14 billion during January-June 2008.

Exports of Indian engineering goods to Malaysia increased 106% to $747 million in 2007-08 while India's imports from that country increased 52% to $569 million during the year. EEPC expects a 100% jump in Indo-Malaysian bilateral trade in engineering goods in the current year.

"As per feedback from 54 out of 169 Indian engineering companies which participated in the Indee, 590 new contracts were generated during the exhibition," said Mr Shah.

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