Government Of Indias Initiatives by Cube Global Partners

Government of India’s initiatives to KICK START the Economy

Contents

CRISIS : What this mayhem was all about???
IMPLICATIONS of CRISIS : Indian economy
INITIATIVES to get back to track :

(i) By Indian Government
(ii) By RBI

RESPONSIVENESS of :

(i) Economy
(ii) Industry
(iii) Liquidity

IMPACT of ELECTIONS

A Brief of the TURMOIL

Crisis began with the bursting of housing bubble in US leading to high defaults on sub-prime mortgages in the summer of 2007.
Securitization of theses toxic assets/loans by many of the major banks & institutions further deteriorated the situation.
One of the other contributing factors are the Credit default swaps. The failure of sub-prime market had hit the CDS market which led to the failure of some of the biggies (like Bear Stearns, Lehman Brothers etc) of US as these institutions had enough CDS holdings to get drowned.
High leveraging & inaccurate credit ratings has also been the causal factors for the crisis.

Implications for Indian Economy
This global meltdown has affected the Indian economy mainly through THREE channels:
(i) Financial integration
(ii) Trade links
(iii) Confidence channel
Our economic growth has dipped to 6.9 in 2009 from 9.8 in 2006.
Indian stock market has been so strongly shattered that it fell down to 8891.61 points from once 21000 points.
Though our banking sector has been fundamentally strong but still it has shaken the confidence.
Trade deficit reached to an alarming level. Rupee has been fluctuating since the beginning of the crisis worsening the plight of exporters as well as importers. The crisis has severely affected the credit availability for common man, SMEs as well as for big industries.
Job scenario has also been hit hard.

Indian Authorities’ Efforts to Get Back to Growth Trajectory
GOVERNMENT’S initiatives
First stimulus package announced in December 2008 was of approximately Rs 31000 crore & meant to revive some of the very crucial sectors like housing, export, automobiles, power, textile & SME.
Very soon government came out with the second stimulus package valued at over Rs 20000 crore in Januray 2009 with a focus on providing more liquidity & cutting the cost of funds.
Government came out with third stimulus package in February 2009 which aimed at slashing the excise duty & service tax by 2% to give relief to the stressed industry.
Fourth stimulus has also been provided by the Indian government through foreign trade policy under which it has announced some special special package of Rs 325 crore for leather & textile sector & many more such steps.

RBI’s Incentives to Revive the Economy
RBI has sought to pump in sufficient liquidity into the banking system through a series of reductions in the CRR ( cutting it down to 5% )& additional flexibility in meeting the SLR requirements (making it 24%) so as to enable bank credit to meet the expanded requirements of the economy.
RBI has also signaled interest rate reductions by lowering down the repo & reverse repo rates.It has slashed down the repo rate from 7.5% to 4.75% & reverse repo rate from 6 to 3.25%.
The Central Bank also relaxed the ECB (external commercial borrowing) norms and NRI deposit rates to invite more liquidity.
It provisioned a Rs 4000 crore refinancing facility to NHB for lending to housing companies to make home loans cheaper.
It also pumped in Rs 7000 crore into SIDBI to help micro & small units which employ millions of people. The guarantee cover on loans to lending institutions has also been raised from Rs. 50 lakh to Rs. 1 crore.

Reaction to these Efforts…
Indian economy has recorded a growth rate of 5.8 per cent in January-March 2009 as against 5 per cent estimated by the analysts & the credit goes to enhanced government expenditure. Investors’ sentiments has also improved significantly. Also there has been seen an increase in hiring, freight movement at major ports & positive signals from industries like cement, steel etc.
Government’s focus has been to stimulate the demand domestically by ways like ensuring flow of credit to trade, industry, investment in Infrastructure, Housing and Real Estate, as ours has always been a consumption based economy. This move has brought a ray of hope as manufacturing sector, auto sector, consumer goods & capital goods have shown positive signals since February 2009. Also the stock market has rebounded more than half from its 2009 dip in this March.
The pro-active fiscal and monetary measures taken by the Government and the Reserve Bank of India seem to be showing result. The overall liquidity situation has improved a lot because of their collective efforts whether it is banking sector or anything related to credit delivery in the trade.
ECONOMY
INDUSTRY
LIQUIDITY

Impact of Elections
The results of recently held LokSabha elections has been a big surprise for everyone. It has shown that common man now wants a stable government who would help economy to get back to growth trajectory as fastly & efficiently as possible.
With the re-election of congress government, the numbers all seem to be looking up & it seems that the spring is back in the air. Some of the facts & figures supporting this fact are:

Sensex posted record 17% gain in a brief period of trading following the news of the election outcome. Also this rally is still going on & Sensex once again has reached to a level of 15000 points.
Rupee also powered up by 3.1% reaching around Rs 47 per dollar.
Foreign capital flows has improved & manufacturing activity is also seeing an upward movement.
April IIP for infrastructure industries grew by 4.3% compared to 2.3% last April.
Indian industry has shown a year-on-year growth of 1.4% in April, 2009( led by electricity (7.1% jump) & mining with 3.8% jump).
Inflation rate is below one per cent(around 0.13%).
Foreign exchange reserves are showing signs of increase.

Conclusion
Though the measures taken by RBI & Government has been welcomed by the industry and other productive sectors & these also have helped to impart a sense of confidence regardingIndia‘s ability to bear the global storm, at the same time it has widened our fiscal deficit to a great extent ( from April 2008 to January 2009 it was 174.3 per cent above that for the corresponding period a year earlier). Also our revenue deficit was up by 278 per cent. It may affect the country’s credit rating which may further influence investors’ sentiments.
So, government is looking forward to deal with the problem by way of steps like divestments, making a hike of 2% in service duty(again taking it to 12%) etc.
Of the three pillars of the Indian growth story – favourable demographics led consumption, infrastructure development and outsourcing, this stability in government would definitely reflect on economy.