Stimulus Packages

E c o n o m ic S t im u lu s M e a s u r e s Ta k e n O n

A c c o u n t o f G lo b a l F in a n c ia l C r is is

Causes

Sustained period of careless lending

Not following prudential norms

Over inflated assets

Price collapse

Liquidity crisis or credit crunch

Its effects Loss of jobs

Increase in loan rates

Lack of funds

Loss of production

Real estate prices

More inflation

General confidence is down

Stimulus packages of important countries

United States

•$700 billion rescue plan (under Bush Govt, more has been given now)

•US Treasury will get this amount in three stages

EU

•$260 billion bailout

•1.5% of GDP

•$30 billion package from UK.

•Reduction in value added taxes from 17.5% to 15%

Contd ...

Japan

•Spending increase of 6.6% from next fiscal year

•This amounts to $990.9 billion

China

•About 570 billion U.S. dollars

•To finance major projects

•Low-income housing, rural infrastructure and

transportation

WHY FISCAL STIMULUS ?

The Current Global Crisis has created an international slump, it is only the domestic demand that can keep the business going. Fortunately, India with its 1.1 billion people can keep this demand afloat. All they need is the purchasing power which the Government is trying to do by pumping in funds into the system.

So, The demand could be boosted by enhancing the components of Aggregate Demand(AD).

AD = C + I + G + (X -M )

Fiscal Stimulus Measures

• Plan, non-plan expenditure of Rs.300,000 crore in four months.

• Parliament nod to be sought for Rs.20,000 crore more toward plan expenditure.

• Interest subvention of two percent on export credit for labour intensive sectors.

• Additional allocations for export incentive schemes.

CONTD……

• Norms for government departments to replace vehicles relaxed.

• Import duty on naphtha for use by the power sector is being reduced to zero.

• Export duty on iron ore fines eliminated.Export duty on lumps for steel industry reduced to five percent.

FISCAL MEASURES

• Full refund of service tax paid by exporters to foreign agents

• Incentives for loans on housing for up to Rs.500,000, and up to Rs.2 million

• Across-the-board cut of four percent in the ad valorem central value-added tax

Contd…

• India Infrastructure Finance Co allowed to raise Rs.100 billion through tax-free bonds.

• Limits under the credit guarantee scheme for small enterprises doubled from Rs. 50 lakh to Rs.1 crore.

• Lock-in period for loans to small firms under credit guarantee scheme reduced from 24 months to 18 months.

Monetary tools….

Cash Reserve Ratio (CRR)

under Section 42 of the RBI Act, 1934.

Statutory Liquidity Ratio (SLR)

under Section 24 of the Banking

Regulation Act, 1949.

Cash Reserve Ratio(CRR)

• General CRR

In terms of Section 42(1) of the RBI Act

1934

Range 3% to 20%

• Incremental CRR

In terms of Section 42(1A) of RBI Act,

1934

Implications

RBI reduces the CRR to 5.5%

the liquidity holding of the banks.

the lending power of the banks.

the private investment.

the purchasing power.

output and demand in the economy.

Statutory Liquidity Ratio(SLR)

SLR reserves in

a) in cash, or

b) in gold valued at a price not exceeding

the current market price,

c) in unencumbered approved securities

valued at a price as specified by the RBI

from time to time.

RBI reduces the SLR to 24%

To increase the bank’s leverage position to pump up more

money in the economy

To enable the banks to lend MFs facing the redemption

pressure

To reduce the call rates

To reduce the PLR

To reduce the home and personal loan interest rates

Implications