Saturday January 3, 01:32 AM

Source: Indian Express Finance

Govt sticks to New Year resolution

By fe Bureaus
The second stimulus package from the government and RBI on Friday received a far stronger endorsement from corporate India than the first. The immediate beneficiaries will be commercial vehicle manufacturers like Ashok Leyland (ASHOKLEY.NS : 51.25 +1.9) and Tata Motors (TATAMOTORS.BO : 575.65 +6.2), as well as non-banking finance companies (NBFCs) such as MandM Financial Services, Sriram Transport Financial Services and Sundaram Finance. But it left the real estate sector which hoped for an extension in the soft interest rate coverage to loans of up to Rs 30 lakh disappointed. Overall, however, industry felt the latest stimulus package of Rs 2.01 lakh crore (including Rs 40,000 crore in foregone revenue), 100-basis point cut in repo and reverse repo, as well as the 50-basis point cut in cash reserve ratio would help companies across sectors. However, industry captains said the success of the measures would hinge on banks providing lower rates to make cheaper credit available to industry and consumers. Ravi Kant, managing director of the country s largest commercial vehicle maker, Tata Motors, said, We welcome the positive steps announced in the fiscal package. But the government needs to work on ensuring that ultimately liquidity reaches customers at reasonable costs. The company s commercial vehicle sales registered a massive drop of 51% in December. Chanda Kochhar, joint managing director of ICICI Bank (ICICIBANK.NS : 848.55 +3.9), in turn, said the reduction in rates is welcome and that she was confident these measures would accelerate the move to a lower interest rate regime across the system . The measures follow RBI s recognition that the downside risks to the global economy have increased. The bank stated that it has shifted its policy stance from demand management to arresting moderation in growth . The key feature of the stimulus package, other than the rate cuts, was the special purpose vehicle mechanism set up on the lines of that used by Washington to bail out Fannie Mae and Freddie Mac. RBI has also allowed NBFCs focused on infrastructure financing to raise external commercial borrowings (ECBs) from multilateral and bilateral institutions. Planning Commission deputy chairman Montek Singh Ahluwalia acknowledged that the biggest problem in the economy was in sectors such as commercial vehicles. This stems largely from NBFCs reluctance to lend. While the SPV will provide Rs 25,000 crore in liquidity support to NBFCs, which are learnt to have Rs 4 lakh crore in exposures, leading public sector banks will provide them a special line of credit for commercial vehicle loans. To boost demand for these vehicles, at least from transporters that can afford to buy them, the Centre has also thrown in an accelerated depreciation benefit of 50% for purchases made between January 1 and March 31. This will improve transporters profitability, Ahluwalia said. The government will also allow states to provide assistance under the massive urban renewal schemes for the purchase of buses for urban transportation. Other measures include steps to help exporters, small enterprises, banks as well as state governments. The government has also deepened the market for rupee denominated corporate bonds, allowing FIIs to invest up to $15 billion from $6 billion in them. Friday s announcement follows December s package, wherein the government reduced Cenvat to 4%, which led passenger car manufacturers to reduce prices. Housing loans for up to Rs 5 lakh were also provided at a reduced 8.50% and of up to Rs 20 lakh at 9.25%. The government has now permitted developers of integrated township to raise funds via the ECB route. The measure would help mega housing projects abandoned by several developers pick up steam. The Central government will also encourage state governments to free up land for low-income and middle-income housing schemes at reasonable rates. Corporate India will not face any interest rate ceiling when accessing debt from abroad now. In addition, India Infrastructure Finance Company Ltd will raise an additional Rs 30,000 crore through tax-free bonds. This will be over the Rs 10,000 crore worth of tax-free bonds that the company has been sanctioned in the first stimulus package. Commenting on the latest measures taken by the government, Suresh Tendulkar, chairman of the PM s Economic Advisory Council, said, The government s steps are all aimed at inducing banks to lend more, encouraging investors to invest and pushing urban consumers to spend more. Thrust Areas and#149; Liquidity and credit: A sharp reduction in repo and reverse repo rates, as well as a significant reduction in cash reserve ratio (details below), is expected to inject Rs 20,000 crore of additional liquidity into the system. It sends a clear signal to banks to provide more loans at lower rates. and#149; Housing and realty: Realty companies can access funds through the external commercial borrowing route for the development of integrated townships. States will be asked to release land for low-income and middle-income housing schemes at reasonable rates. and#149; Auto industry: Public sector banks will provide a line of credit to NBFCs for those buying commercial vehicles. States can also dip into urban renewal funds to buy buses for urban transport systems. Accelerated depreciation of 50% for commercial vehicles bought between January and March. and#149; Non-banking finance companies: Infrastructure financing NBFCs can access overseas borrowings from multilateral or bilateral financial institutions. A special purpose vehicle will also be set up to provide around Rs 25,000 crore in liquidity support against investment-grade paper to NBFCs. and#149; Government spending: The Centre says it will not increase expenditure further in 2008-09. But state governments have been given the go-ahead to raise Rs 30,000 crore, or up to 0.5% of the state s GDP, through additional market borrowings for capital expenditure this financial year.