India jumps on the Stimulus Package Bandwagon

by Manshu on December 9, 2008

in Articles

Over the weekend the Indian Government announced a stimulus package targeted at dealing with the global recession. The government estimate for GDP growth this year is 9%, and, the global recession is expected to shave off about 2% from this.

The stimulus package is $4 billion dollars, and, is much smaller than that of China or US (even as a percentage of GDP).

This is expected to get bigger next year when the government announces its budget for the next fiscal. The commerce minister has indicated that this is just step one, and, that there will be more steps like the current one.

Here are some measures that the government proposes to take:

  1. Reduce taxes: The government will reduce Value Added Tax (VAT) by 4% on all products except for petroleum.
  2. Reduce Petrol and Diesel Prices: The prices of petrol and diesel are set by the state in India, and, are heavily subsidized. The government will slash petrol prices by 6% and diesel by 10%.
  3. Credit window for small businesses: The Small Industries Development Bank of India (SIDBI) will open up a credit window worth $1.5 billion for small businesses within the country.
  4. Government to issue tax free bonds worth $2 billion: The government is going to issue tax free bonds worth $2 billion and then use that money to fund infrastructure projects.

India has got a massive deficit of 10% and although inflation is currently low (relatively) at 8%, it was as high as 12% in October.

A combination of these two factors limit the extent to which the government can provide a boost to the economy. The industry is clearly not happy with the current package and has expressed that it is not enough. The billion dollar question, however, is – how much more can India afford?

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