Pranab unveils 3rd package

Pranab unveils 3rd package
The Financial Express, February 25, 2009, Page 1

Economy Bureau

Announcing the third stimulus package in as many months to boost flagging demand, the UPA government on Tuesday announced fiscal sops amounting to Rs 30,000 crore, the most significant being an across-the-board 2% cut in central excise duty and service tax.

Though industry chambers hailed the incumbent administration’s farewell gifts, they stressed that an interest rate cut by RBI was imperative to spur investment, consumption and reduce pressure on bond yields due to increased government borrowings.

While central excise duty has been slashed to 8% from the earlier 10%, service tax will be levied at 10% from the previous 12%. As a further sweetener to corporate India, the 4% excise duty cut announced under the first stimulus package in December has been extended beyond March 31, 2009.

Finance minister Pranab Mukherjee also announced measures to address sectoral concerns. Bulk cement will now attract central excise at 8%, or Rs 230 a metric tonne, whichever is higher, from the existing 10% or Rs 290 a mt. Similarly, to provide relief to the power sector, naphtha imported for the generation of electricity has been fully exempt from basic customs duty beyond this fiscal.

After the tax breaks, prices of commercial vehicles and consumer durables like refrigerators and washing machines are expected to come down. Similarly, steel companies producing long products like Sail and Tata Steel are expected to benefit. Since the price of naphtha has also been clipped, projects like NTPC’s Kawas will be in a better financial position.

Explaining the rationale behind the steps, Mukherjee said, “Latest figures confirm that our two fiscal packages are steps in the right direction. These are encouraging signs (but) the full impact of the recession in other parts of the world, especially Europe and Asia, is yet to unfold. Due to the strong export linkages with these economies, it is likely that the Indian economy may feel a further impact in coming months.”

The sops won’t come cheap. “The measures will lead to revenue loss of Rs 13,000 crore in service tax, Rs 8,500 crore in excise duty and Rs 6,600 crore in customs duty,” Central Board of Excise & Customs chairman PC Jha said. The Centre has already revised its tax collection figures for 2008-09 downwards to Rs 6,27,949 crore from the budgeted target of Rs 6,87,715 crore.

Consequently, the fiscal deficit for 2008-09 will probably overshoot the estimated 6% of GDP. “They are trying to revive demand in the economy, but I am not sure if it is a prudent move. The tax cuts will increase the fiscal deficit by another 0.5% at least, and in a fiscally strained situation, this will add to the stress,” said National Institute of Public Finance & Policy director M Govinda Rao.

Nevertheless, Mukherjee was under pressure to provide sops after the interim Budget offered little to help the economy despite industrial production contracting by 2% in December. “The government is keen that business confidence in the services sector is restored,” the finance minister said during his reply to the debate on the interim Budget in the Lok Sabha.

Meanwhile, giving further leeway to state governments to announce their own stimulus measures, the Centre has also given them the flexibility to deviate from their fiscal consolidation targets for another year and borrow an additional 0.5% of state GDP to “spur the development of infrastructure and employment generation”.

“This arrangement could be further reviewed, if necessary,” Mukherjee said. States are currently sitting on around Rs 91,000 crore in cash and have been permitted to borrow up to 3.5% of state GDP in 2008-09. Following the discussion, the interim Budget was passed by the Lok Sabha.

Domestic equity bourses, which witnessed heavy sell-offs by FIIs following the overnight sharp plunge on Wall Street, recovered sharply with government’s announcement. The 30-share Sensex of the BSE, which slipped to an intra-day low of 8,619.22 points after shedding 224 points in early trading, closed the day with only a marginal loss of 21.15 points, or 0.24%, at 8,822.06 points. Similarly, the 50-share Nifty of the NSE closed at 2,733.90 points, a marginal loss of 2.55 points, recovering sharply from the day’s low of 2,677.55 points.

Reacting to the government’s measures, KPMG executive director Pratik Jain said, “The duty cuts are a positive move and will help generate demand, especially in manufacturing and consumer goods. But the measures may take some time to take effect.”

A Sakthivel, president of Federation of Indian Export Organisations, said the measures would give the economy only a limited boost. He said the service tax cut would add to export competitiveness by about 0.25%.

Farewell gift
• Package to cost exchequer Rs 30,000 crore
• Excise duty and service tax reduced by 2%
• Excise duty on bulk cement trimmed to 8%
• Earlier 4% relief extend beyond March 2009
• States may borrow 0.5% more of their GDP