Definition

According to the United States National Bureau of Economic Research, it is

"a significant decline in economic activity spread across the economy,
lasting more than a few months, normally visible in real GDP, real income,
employment, industrial production, and wholesale-retail sales."

Economic recession is a contraction phase of the business cycle. The

common definition for recession is that there is a relative decline in a country's
gross domestic product or GDP. Having a negative real economic growth for
two or more successive quarters is also a telltale sign for economic recession.
Gross domestic product is the market value of all the products and services
produced in a region or commonly, country, in a year. GDP is the total output of
the economy. Since the gross domestic product or the output is declining. Firms
and companies will sever their ties with several employees resulting to
unemployment.
A severe or long recession could be an economic depression. The difference
between recession and depression is when the GDP is declining by 10%, that
means what the economy is experiencing is already depression. A short lived
recession is often called economic correction.
Economists may argue with the definition of an economic recession. They may
even debate whether the United States, specifically is experiencing an economic
downturn. But it is not only the economists who can decide and identify an
economic downfall; it is the ordinary people who can readily identify economic
growth and demise.

Background of the Global Financial Crisis; What is it all

about?

It all began with the one and all American dream, that every American should
have a home. Regardless of who you are and what you do, if you are an
American, you should have something called a home. Real Estate business was
in a boom, and financial agents thought that there wasn’t a better time to give
away loans. The Household sector was given a boost with increased monetary
supply by commercial financial companies, and people were given loans
regardless of the credit rating they received. It was never expected that the boom
in the Real Estate business would come to such an abrupt end, and the prices
would reach all time low. The US economy being a capitalist driven economy
didn’t bother to indulge itself in the policies pursued by the then prominent
financial giants. Gradually these financial giants in this business started feeling
the heat as “sub-prime” clients started defaulting in their repayment of loans. The
properties which were mortgaged by the clients weren’t even covering the
principal amount of the loan, leave alone the interest commitments. The credit
offered to the people in indiscriminate fashion, achieving short term goals and
ignoring warnings from leading
economists about long term sustainability of the policy, backfired completely and
companies like Lehmann Brothers, Merill Lynch, Freddie Mac and Fannie Mae’s
“bad assets” reached magnanimous proportions. An acute credit shortage was
experienced in the economy, and simultaneous negative effects started
occurring. The credit crunch meant that borrowing interest rates shot up in the
market, companies slowed down their investment policies, production declined,
lay offs increased, consumption decreased and the whole economy followed the
downward spiral. The unemployment rate in the US reached an all time high of
6.1% and industrial growth saw its largest decline in the past three years and fell
to 1.1%. The US governments realized the gravity of the situation, and started
using monetary as well as fiscal policies to check the diminishing economy.
Fiscal policy boost in the way that, an amount of around US$ 1 trillion was
pumped into the economy to increase the liquidity scenario. The financial
companies which filed for bankruptcy were nationalized, or there non-performing
assets were accounted for by the government. The Federal Bank of US also
lowered the monetary policy rates, like Statutory Liquidity Ratio (SLR), relating to
the amount of money required to be deposited by commercial banks to the
Federal bank, so as to have some check on the sky high interest rates. These
policies which were targeted to cushion the huge credit shortage scenario has
taken somewhat affect and the situation has stabilized a bit. But, as leading
economists say, it is too early to comment on whether the trough of the graph
has reached or not, or it is still the “tip of the iceberg” scenario. This fear is out
there still because there is uncertainty over how many more “sub-prime” creditors
are still there in the economy, and how many more companies will get affected
by the fallacious policy, which was followed by short-sighted profit oriented
companies.

Impact on the Indian Economy

The financial crisis in the US, slowly snowballed to an economic crisis, with
growth in the economy stagnating. Efforts have been taken by the US authorities
to restore the fully functional markets, but there’s an obvious time lag. Till then,
the world economy has been affected by this deep economic crisis and India is
no different. India being a net import driven economy, with exports (including the
service sector) contributing 17% of GDP, is a little less vulnerable than other
economies. Moreover we still have a socialistic pattern of economy where there
is enough government intervention, which has somewhat checked the situation
from becoming graver. At the present scenario it is a bit difficult to exactly
quantify the implications of the global financial meltdown, but a few salient
features are:-
• Indian IT companies have around 30% exposure to foreign financial services.
• Funding constraints would result in uncertainty in the real estate sector.
• While direct exposure for financial institutions is negligible, but there are a few
firms which have impact on its margin.
• Foreign Direct Investment and Foreign Indirect Investment have decreased
dramatically with the liquidity crunch, with companies selling their stakes in a
hurry.
• The rupee has significantly depreciated due to the outflow of foreign reserve
capital. The Government of India and Reserve Bank of India accepted these
challenges and took measures, discussed subsequently, to control the effects of
the implications mentioned above. The holistic point of view is that it was
imperative to improve the liquidity situation in the market as lack of liquidity led to
the following effects:-
Lack of lack of money available to commercial banks for offering credit.
Borrowing interest rates went up.
Industrial Sector deferred its investment plans.
Decrease in Production.
Appreciation in price of commodities.
Inflationary trends.
Consumption of Household Sector decreases.
Government revenue in form of indirect taxes decreases.
Fiscal deficit increases.

So we have a glimpse of the downward spiral that affects the economy as a

whole, i.e. the household, industrial, government and the foreign trade sector,
and hence realize the urgency of the government and the apex bank to apply the
controlling measures.

Role of Government in Recession

Recessions are generally believed to be caused by a drop in spending.

Governments usually respond to recessions by adopting expansionary
macroeconomic policies, such as increasing money supply, increasing
government spending and decreasing taxation. And all this is done

through an economic bill called ‘Stimulus Package’

Definition of Economic Stimulus

Economic stimulus is a term used by economists to define a situation where the
government changes its fiscal policy of spending and taxation in order to bolster
and revive an economy that is in a recession. By spending money on state and
federal infrastructure, the government hopes to provide jobs, and jump-start the
failing economy.
To understand what a stimulus bill is intended to do, one must first understand
what causes an economic slowdown or recession--namely less spending. If
people and companies spend less, they buy less, meaning companies produce
less, meaning they need fewer workers, meaning they pay less or let workers go,
meaning people have less money to spend and it starts all over again.
In short, an economic stimulus bill is federal legislation that designed to inject
money into the economy quickly so people spend it (rather than save it or pay off
old debts neither of which generate new economic activity) thereby breaking the
chain of less spending and restarting economic growth. There are a number of
ways policymakers can try to do this.

1. Economic Stimulus Proposals

Generally, there are two ways for the federal government to put more cash into
the economy -- spend more or tax less. Each of these methods has positives and
negatives and within each category there are a number of specific proposals that
have demonstrated various levels of success. Spending proposals include direct
payments to individuals such as the rebate checks most Americans received
earlier this year. Other options include extending unemployment benefits,
increasing food stamps payments and funding infrastructure projects like roads,
schools and bridges.
Tax proposals include reducing or eliminating the payroll tax, temporarily
lowering tax brackets, reducing capital gains tax, lowering corporate tax rates
and accelerating depreciation on capital equipment purchases so companies
have an incentive to buy new equipment.

2. Economic Stimulus Bill Are Temporary

To be successful, any stimulus bill must be temporary since the goal is to shock
the economy out of a downward trend and cause individuals and companies to
change their behavior. That is why rebate checks are so popular as a stimulus
tool, because it is money in peoples' pockets that they did not expect and,
therefore, are more likely to spend.

3. History of Economic Stimulus Packages

Most of the in the US don’t remember the tough times of the 1930’s just following
the stock market crash of 1929. The crash was characterized by mass
unemployment. It was a time when most Americans couldn’t earn enough money
to provide for their families. People lost their life’s savings when the banks closed
and were left on the streets when businesses and factories closed down.
The New Deal of the thirties had much the same goals as the 2009 package.
Road projects, dams and national parks projects were all infrastructure that
appeared from those times. These projects provided jobs for the American
families who desperately needed work, helped to increase the availability of
inexpensive energy and connected the country from coast to coast. Each of
these results were long term and beneficial. One of the drawbacks of the projects
was that families were broken apart when the job was geographically different
than the worker’s residence.

4. Do Stimulus Plans Work?

Feelings are mixed, as to the effectiveness of the stimulus plan of 2008 and
2009. Our leaders are saying that the plan is working better than they expected
and that it is more effective than was projected. People on the street are still
waiting for it to affect them. With so many still out of work and still seeing their
friends and colleagues joining the ranks of the unemployed the real questions
are: when will it affect me?
Only time will tell if the government officials have made the right call. It remains
to be seen how long it will take before unemployment will turn around and peopel
will go back to work. There are still questions as to how the banking industry will
fair in the aftermath. We already know that consumer interest rates have risen
and most credit companies have pulled back on the amount of available credit to
their customers. The final lesson to learn from the collective mistakes of our
economy is to make your own house operate on sound fiscal policy. Live within
your means and limit your debt. If you can do this, you will be able to weather
any economy, good or bad.
Economic Stimulus Package of 2008-2009
A stimulus package for the economy, was announced by the government and
Reserve Bank, was a one-off assistance, but it was the first in the series of
measures to help the sectors hit by the global slowdown. The economic
stimulus package that our leaders passed in 2009 included a free check to
each worker that amounted to $ 4. Billion. That was direct money given to
individuals, but the package also made funds available to states to fund public
works projects. Repair and expansion of roads, help for under funded education,
small business loans and mass transit are just a few of the places the spending
is being directed. A large portion of the stimulus package for business has been
funding the bailout of failing banks, supporting auto manufacturers that were
having reduced sales due to the lack of buyers and supporting companies that
invest in cleaner energy and green technology.
Another aspect of the stimulus plan included the creation of jobs. As of
September 2009, there have been very few new jobs produced; much less than
the promised 3.5 million jobs. While about 150,000 jobs were saved or supported
by the stimulus package, unemployment rates have continued to climb to 9.6% at
the time of this article and are projected to top 10% by the end of the year, 2009.

The Commerce and Industry Minister, Kamal Nath said, "This will not be a
single package. There will be a first package, second and third part of it." The
RBI is also expected to announce a fresh round of rate cuts tomorrow, to lower
the borrowing costs further. The central bank has already cut its benchmark
short-term rate by 150 basis points to 7.5%. It has also reduced the CRR by
3.5% to 5.5%. Regarding the details of the stimulus package, prepared by the
Committee of Secretaries in consultation with the RBI, Commerce Secretary G
K Pillai said, "Let the Prime Minister announce it tomorrow."
According to Pillai, Rs 15,000 crore budgetary support would be extended to the
infrastructure projects, while sops worth Rs 2,000 crore would be extended to the
recession-hit exporters.
Prime Minister Dr. Manmohan Singh, who has since taken the additional
charge of the finance portfolio, chaired a meeting of the apex committee on
December 2, to discuss the stimulus package. A government survey of 121
export-oriented manufacturing units indicated 65,000 job cuts in the last three
months with worsening of the the global economic situation.

Highlights of India's fiscal stimulus package:

Amount : First Package US 4. billion (Rs. 20,000 crore) (the Indian News: 7
December 2008)
The fiscal package, a modest one, was intended to keep the domestic demand
high as well as to provide incentives to some selected export sectors. This
included enhanced credit for exports, cut in excise duties, relief to the dooming
housing sector and SMEs.
According to the Deputy Chairman of the Planning Commission Mr. Montek
Singh Ahluwalia, the package will, “minimize the impact of weak global
economy on the Indian economy” and help achieve a 7% growth rate.

Monetary /Fiscal:
- A cut in interest rates by India’s central bank: The Reserve Bank of India
reduced its repo rate, the rate at which it lends to commercial banks -to 6.5
percent, and its reverse repo rate —- the rate at which it borrows overnight — to
5.0 percent.
- Interest subvention of two percent on export credit for labour intensive sectors
- Additional allocations for export incentive schemes
- 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
- Limits under the credit guarantee scheme for small enterprises doubled
- Lock-in period for loans to small firms under credit guarantee scheme reduced
- India Infrastructure Finance Co allowed to raise Rs.100 billion through tax-free
bonds
- 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

The RBI also announced that it will extend a line of credit to small scale
industries and housing finance banks:
The government announced a cut in Centrally-imposed Value Added Tax by 4%
to increase spending across-the-board
• To boost exports, govt. announced extra allocation of 70 million dollars.
• To boost infrastructure spending, the government authorized a recently
created India Infrastructure Finance Co. Ltd to raise Rs. 10,000 crores
through tax free bonds.
• The government also announced that initiatives are being taken to support
Public Private Partnership programme of Rs. 100,000 core to the highway
sector.
• To boost housing sector, public sector banks were urged to announce
attractive home loan packages.
• The government decided to seek authorization for additional plan
expenditure of upto Rs. 20,000 crore in the current year mainly for critical
rural infrastructure and social security schemes such as Pradhan Mantri
Gram Sadak Yojana, Jawaharlal Nehru National Urban Renewal Mission,
National Rural Employment Guarantee Scheme, India Awas Yojana,
Accelerated Irrigation Benefit Programme and National Social Assistance
Programme.

In the light of the decline in exports by 12%, the government has decided to
subsidize this sector with an interest subvention of 2% upto March 2009 to pre
and post shipment export credit for labour intensive exports like textile, leather,
marine products and SME sector.

Detailed Analysis

Plan, non-plan expenditure of Rs.300,000 crore

(Rs.3,000 billion/$60 billion) in four months

Plan Expenditure for 2008-09 was placed at Rs.2,43,386 crore in the Budget
Estimate. It had gone up to Rs.2,82,957 crore in the Revised Estimate. The
additional plan spending of Rs.39,571 crore is on account of an increase in
Central Plan by Rs.24,174 crore and an increase of Rs.15,397 crore in the
Central Assistance to State and UT Plans. The Central Plan expenditure has
increased for Rural Development, Atomic Energy, Telecommunications, Textiles,
Urban Development, Youth Affairs and Sports and Railways. The increase in
Central Assistance for State and UT Plans is on account of additional Central
Assistance for Externally Aided Projects, Accelerated Irrigation Benefit
Programme, Roads and Bridges, National Social Assistance Programme,
Jawaharlal Nehru National Urban Renewal Mission and Tsunami Rehabilitation.

On the Non-Plan side, the additionality of Rs.1,10,498 crore in the Revised

Estimates is accounted for by an increase in the expenditure of Rs.44,863 crore
on fertilizer subsidy, Rs.10,960 crore on food subsidy, Rs.15,000 crore on
Agricultural Debt Waiver and Debt Relief Scheme, Rs.7,605 crore on Pensions,
and Rs.5,149 crore on Police. An additional amount of Rs.9,000 crore has also
been provided for Defence expenditure.
2. India Infrastructure Finance Co tax-free bonds:

Company Profile Of IIFCL:

India Infrastructure Finance Company Ltd (IIFCL) was established in January
2006 as a wholly owned Government of India company and commenced its
operations from April 2006. India Infrastructure Finance Company Ltd (IIFCL) is
providing long-term financial assistance to various viable infrastructure projects in
the country. The authorized capital of the company is Rs 2000 crs and the Paid-
Up capital is currently Rs 1000 crs. Apart from the equity, IIFCL is planning to
raise long-term debt from the domestic market, bilateral and multilateral
institutions and in foreign currency through external commercial borrowings
(ECB’s). The borrowings of the company are backed by sovereign guarantee

The global meltdown has led to recessionary scenario in the country. To beat this
blues government is significantly increasing spending on infrastructure with
stimulus packages announced. Now the focus is on rapidly implementation of the
programs and projects. However due to global financial crisis infrastructure
financing has been badly hit – firms executing projects don’t have the equity, and
those that were smart or lucky enough to have raised equity earlier are finding it
difficult to raise debt. Banks, which have the money to lend, are wary of an asset-
liability mismatch. Hence the government is focusing on strengthening and
refinancing of India Infrastructure Finance Company Ltd. (IIFCL) to drive the
economic growth. IIFCL was created in April 2006 with Rs. 100 crore of capital. It
has been promoted by the Centre to provide long-term finance to infrastructure
projects directly as well as to banks and financial institutions for loans of a tenor
exceeding, 10 years, will be the lead fund arranger for these projects. Within the
short time since its inception IIFCL has emerged as a nodal agency for financing
infrastructure projects. It has sanctioned $3.7 billion of financial assistance to 101
infrastructure projects which have a project cost of over $29 billion - no other
financial intermediary in the country has lent as much in such a short time.
Almost 90 infrastructure projects have already achieved financial closure
because of IIFCL

Stimulus to the IIFCL:

In order to boost investment in the infrastructure sector, the government
authorized the state-run India Infrastructure Finance Co. Ltd (IIFCL) to raise
Rs.100 billion through tax-free bonds by March 2009. Announcing a
Rs.3,000-billion ($60-billion) stimulus package to pump prime the economy, a
government statement said IIFCL, set up to finance infrastructure projects in the
country, could use the fund to refinance port, highway and power projects, being
developed under the public-private-partnership model.
Speaking of the stimulus package, Planning Commission Deputy Chairman
Montek Singh Ahluwalia told reported that around 60 highway projects and
several power and port projects were now being cleared by the government.
These projects may experience difficulty in reaching financial closure given the
current uncertainties in the financial world. The bond funds will be used by IIFCL
to refinance bank lending of longer maturity to eligible infrastructure projects, he
said. Depending on need, IIFCL will be permitted to raise further resources by
issue of such bonds, the government said.

Tax Benefits Notification

These bonds carry a tax-free status as per Notification No. 09/2009 issued by
Government of India, Ministry of Finance, Department of Revenue, and Central
Board of Direct Taxes on 7th January 2009. The same is published in the Gazette
of India, Extraordinary, Part II, Section 3, Sub section (ii). However the
bondholders are advised to also consult their own tax advisor on the tax
implications of the ownership and sale of bonds, and income.

Features Of The Issue:

Infrastructure Bonds, India were available through issues of ICICI and IDBI, in
the name of ICICI Safety Bonds and IDBI Flexibonds. They reduced tax liability
by upto Rs 16,000 per annum. Both the Infrastructure Bonds, India had provided
investors the option of purchasing and holding the instruments either as physical
certificates or in the demat form. The Tax-Saving Bond from ICICI for the month
of July 2001 provides two options:
Face value of Rs 5,000 for 3 years at the rate of 9.00% interest payable annually
Deep Discount Bonds with a face value of Rs 6,600. These bonds are available
for Rs 5,000, and are issued for 3 years and 4 months, after which they are
redeemed at their face value. These infrastructure bonds are suitable for an
increase in the investment. The terms for the IDBI Bonds are similar also.

Apart from the above Infrastructure Bonds India, Rural Electrification Corporation
(REC) has come out with an issue of tax-saving infrastructure bonds for investors
seeking to utilize the additional Rs 30,000 qualifying limit for investments in
Infrastructure Bonds, India.

Infrastructure Bonds, India do not offer any protection against high inflation since
the rate of interest they offer is pre-determined. Against Infrastructure Bonds,
India by pledging them with a bank one can borrow from banks. The amount
depends on the market value of the bond and the credit quality of the instrument.
Moreover, it should be noted that although Infrastructure Bonds are considered
to be safe, there is no assurance of getting the full investment back

Terms of Issue
Issue Size: Rs Rs 1000 crs with the option to retain oversubscription upto Rs
2630.7 crs.
Opening Date: 18th Feb 2009
Closing Date: 6th March 2009
Instrument/ Facility - Unsecured Redeemable Non Convertible Tax-free Bonds
in the nature of promissory notes.
Issue Price - At Par (Rs.1,00,000 /- per Bond)
Redemption Price - At Par (Rs.1, 00,000/- per Bond)
Tenure – 5 Years
Minimum subscription – 10 Bonds (Rs 10 lakhs) and then in multiple of Rs 1
bonds (Rs. 1 lakhs)
Coupon Rate – 6.85% tax free payable annually (Pre Tax – Yield – (10.37%)
Listing - Proposed on the Wholesale Debt Market (WDM) Segment of the
5Bombay Stock Exchange Ltd. (BSE).
Type of Eligible Investors:
1. Resident Indian individuals;
2. Scheduled Commercial Banks;
3. Financial Institutions;
4. Insurance Companies;
5. Primary/ State/ District/ Central Co-operative Banks (subject to permission
from RBI);
6. Regional Rural Banks;
7. Mutual Funds;
8. Provident, Gratuity, Superannuation and Pension Funds;
9. Companies, Bodies Corporate authorized to invest in bonds;
10. Trusts & Societies registered under the applicable law

Analysis Of Stimulus to IFCL:

On Profits & Working of Company

Profits (crore)

160
140
Profir in Crore

120
100
80 Profits (crore)
60
40
20
0
2007 2008 2009 2010
Year

The company had a net profit of Rs 14.10 crore in the previous fiscal. income of
the company during 2008-09 increased over five-fold to Rs 634.86 crore, the
company said in a statement. However, the total expenses increased from
Rs 86.67 crore to Rs 485.15 crore, mainly on account of cost of borrowings.
Hence the profit for the year 2008-09 stood at 82 crore.
On The Working Of the company
IIFCL since its inception in 2006 has sanctioned Rs 18,714 crore to 108
infrastructure projects. Financial Performance (FY 2008-09)
IIFCL has been earning Net Profit from the first year of its operations. The
company has continued its strong growth during the subsequent years which is
reflected in its improved financial performance.

· Non-performing Advances (NPAs) were NIL%

· Net Worth increased from Rs8.29 billion to Rs14.34 billion
· Profit Before Tax increased by 344% from Rs0.34 billion to Rs1.51 billion
· Provision for Standard assets increased from Rs 0.07 bn. to Rs 0.13 bn.
· Infrastructure reserve improved from Rs0.08 billion to Rs0.17 billion
Profit After Tax grew by 396% from Rs0.14 billion to Rs 0.70 billion

Benefits to investors:
By Infrastructure Bonds India or Tax-Saving Bonds an investor can save on
taxes as provided under Section 88 of the Income Tax Act, 1961. The two
significant economic factors playing vital role in the investment decisions of
Infrastructure Bonds India are Inflation and interest rate movements. For
instance, price of a bond will fall if interest rates rise and vice-versa.

3. Ad valorem central value-added tax

A four percent cut in central value-added tax to help corporate India in
general and sops for exporters, housing, infrastructure and textiles sectors
were all part of the package to stimulate growth, which was personally
overseen by Prime Minister Manmohan Singh, who now also holds the finance
portfolio. A four percent reduction in CENVAT means price of each product
will comedown by four cent and car prices came down by four cent.
To provide a fiscal stimulus to the economy through stimulation of demand and
relief to the manufacturing sector, Government has carried out certain changes in
Excise and Customs duty rates. Some changes have also been made in respect
of Service tax refund scheme for exporters. The details of these changes are as
under:

The three major ad valorem rates of Central Excise duty viz. 14%,
12% and 8% applicable to non-petroleum products have been reduced by 4
percentage points each. The revised rates will be 10%, 8% and 4% respectively.

1. Cars, other than small cars, attract composite rates – that are a combination
of specific and ad valorem rates. The rates applicable hitherto were ‘24% +
Rs.15,000/-` per unit for cars of engine capacity 1500 cc to 1999 cc and ‘24% +
Rs.20,000/-` per unit for cars of engine capacity of 2000 cc or more. The ad
valorem component of these rates has been reduced from 24% to 20%.
2. In the case of cement, which attracts either the ad valorem rate of 12% or
specific rates (Rs./metric tonne) depending upon the retail sale price, the specific
rates have also been reduced in the same proportion as the ad valorem rate.
Further, the concessional rates for cement produced by mini-cement plants have
also been reduced proportionately. Bulk cement would now be chargeable to
either 10% ad valorem or Rs.280/- per tonne, whichever is higher.

3. The rate of duty on cotton textiles and textile articles has been reduced
from 4% to Nil. Stimulus package included an interest subvention of two per cent
up to March 2009 for pre and post-shipment export credit for labour-intensive
exports (textiles, leather, marine products) and SME sector. Seeking further help
from the Government, the Clothing Manufacturers Association of India has asked
for two per cent interest subvention, removal of income tax on exports, an
increase in duty drawback rate and changes in the labor law. In an effort to
increase India's share in the world textile market, the Government has introduced
a number of progressive steps.
• 100 per cent FDI allowed through the automatic route.
• Technology up-gradation Fund Scheme (TUFS) which was launched to
facilitate the modernization and up-gradation of the textiles industry in 1999 has
been given further extension till 2011–12.
• Scheme for Integrated Textile Park (SITP) has been started to provide world
class infrastructure facilities for setting up textile units through the Public Private
Partnership model

No change has been made in the excise duty rates on petroleum products,
specific rated items and tobacco products.

Notification No.58/2008-Central Excise and Notification No.59/2008-Central

Excise, both dated 07.12.2008 have been issued in this regard.

Analysis of cut in CVAT:

1. On Automobile Industry:
The measures immediately resulted in several automobile companies cutting
prices by four percent, as the reduction in value-added tax alone will ensure that
every product becomes cheaper by at least four percent. Owing to CENVAT
rate cut by Government of India, car makers are set to cut the prices of
their models. Maruti Suzuki , Tata Motors, GM India and Mahindra & Mahindra
announced that they would pass on the entire benefit of the four per cent cut in
Central Value Added Tax to the consumers. The ad valorem components of large
cars have been reduced from 24 per cent to 20 per cent. In case of small cars,
the ad valorem component has been reduced to 8 per cent from 12 per cent.
The companies had passed on the benefit… across products– passenger and
commercial vehicles. This helped in increasing the demand.
Sale of Automobile:
Growth
Manufacturer Sep-09 Sep-08 rate
Four Wheeler
Marauti Suzuki 83,306 71,000 17.30%
Hyundia Motors 53,804 46,218 16%
Tata Motors 52,531 49,647 5.80%
(M&M) Mahindra 26,921 22,729 18.40%

Two Wheeler
Hero Honda 401,290 385,262 21.70%
Bajaj Auto 249,795 218,494 14.30%
 90,000
2. Cement:
The Government has announced a 2 per cent cut on the excise duty of bulk
83,306
cement; this taken with the earlier 4 per cent cut in excise duty, brings the duty
on bulk cement to 8 per cent now With the reduction in excise duty on bulk

80,000
cement effective from Wednesday, the cement industry, though still working out
the impact, has said that the benefits of the cuts will be passed on to the end
consumers. Duty cuts for cement to reduce cost of constructions. With the
latest excise cut, bulk cement was at par with trade cement with a flat excise duty
of 8 per cent.
The duty cut on bulk cement, which constitutes around 8-10 per cent of the entire

70,000
cement sales in the country, will bring down the taxes from Rs 290 a tonne to Rs
230.

Amrit Lal Kapur, managing director of Ambuja Cements, said, "Excise duty
on bulk cement is levied on the negotiated contract prices between the producers

60,000
and the buyers. This way, the entire reduction will automatically be passed on to
the end consumers."

Hari Mohan Bangur, CMD of Shree Cement and president of the Cement
Manufacturers' Association, said, "The industry will pass on the entire duty
cuts to the consumers. The last fortnight had seen prices firming up by Rs 2-5 a
bag, but now with the latest duty cuts, prices would come down." North-based
Shree Cement is one of the largest cement makers operating in the bulk cement
category.
 14
3. Textile:
The stimulus package announced by government recently has been totally
disappointing as far as textile and clothing industry is concerned. The cut
in excise duty and service tax will had marginal impact on the country’s textile

12
industry. While textile makers gained from the cut in service tax, they had
not gained much from the excise duty cut as most of them don’t pay any
excise, except on some inputs and machinery.
“There’s not much impact on textiles, except for savings on inputs like dyes and
chemicals, spare parts or machinery. There was savings on their purchase,’’ said
Jayesh Shah, CFO, Arvind Mills. But no one is investing in capacity expansion.
There’s no excise duty on cotton textiles though synthetic textiles (polyester yarn
or fibre) attract an excise duty of 4 per cent but the same has not been impacted

10
as the duty has been cut on items that currently attract excise of 10 per cent. The
excise duty cut on inputs will have a little impact, said O P Lohia, CMD, Indoma
e
Synthetics, as the excise on inputs is “modvatable” with the excise paid on the
product, and a manufacturer has to pay a duty only on the difference.

Cotton Export from India

Year Quantity (in lakh bales of 170 kgs) Value (in Rs./Crores)
1996-97 16.82 1655.00
1997-98 3.50 313.62
1998-99 1.01 86.72
1999-00 0.65 52.15
2000-01 0.60 51.43
2001-02 0.50 44.40
2002-03 0.83 66.31
2003-04 12.11 1089.15
2004-05 9.14 657.34
2005-06 47.00 3951.35
2006-07 58.00 5267.08
2007-08 85.00 8365.98
2008-09 50.00 N.A.

These measures do not address the problem being faced by textile exporters,
said D K Nair, secretary general, Confederation of Textile Industry. He estimates
that textile exports have come down by 5-10 per cent in the last three months,
which are likely to fall 10-15 per cent FY 2009-10.
“Many retail chains and stores are in bad shape. Some garment makers have no
orders after April and there are no signs of recovery,’’ says Nair.
A. The excise duty on pure cotton textiles beyond the fibre stage which had been
reduced to zero in the stimulus package has been restored to a 4 per cent optional duty.
When the excise duty had been reduced to zero, companies with accumulated CENVAT
credit were left with no avenue to use that credit. Now, with the excise duty being
restored to its earlier 4 per cent optional level, companies will be able to utilise their
accumulated CENVAT credit.

B. The excise duty on man-made fibres and yarns has been raised to 8 per cent from
the earlier level of 4 per cent. While this will increase polyester prices by Rs 2.5 per kg, it
will not affect demand as polyester continues to be cheaper than cotton and substitution
will continue.

C. The extension of 2 per cent interest subvention on pre and post shipment export
credit by a period of six months till March 31, 2010, will result in interest costs for
exporters declining by around 1 per cent.

Credit Guarantee Fund Scheme for micro and small

enterprises

What is a Micro, Small or Medium Enterprise?

The earlier concept of ‘Industries’ has been changed to ‘Enterprises’
• Enterprises have been classified broadly into:
(i) Enterprises engaged in the Manufacture / production of Goods pertaining to
any industry; &
(ii) Enterprises engaged in providing / Rendering of services.

•Manufacturing enterprises have been defined in terms of investment in

plant and machinery (excluding land & buildings) and further classified into

- Micro Enterprises - investment up to Rs.25 lakh.

- Small Enterprises - investment above Rs.25 lakh & up to Rs. 5 crore
- Medium Enterprises - investment above Rs. 5 crore & up to Rs.10 crore.

• Service enterprises have been defined in terms of their

investment in equipment (excluding land & buildings) and further
classified into:
- Micro Enterprises – investment up to Rs.10 lakh.
- Small Enterprises – investment above Rs.10 lakh & up to Rs.2 crore.
- Medium Enterprises – investment above Rs. 2 crore & up to Rs. 5 crore

It is not necessary to engage in manufacturing activity for self-employment. One

can set up service enterprises as well .

Micro, small and medium enterprises are frequently hailed as the backbone of
the economy. There is widespread consensus on their significant contribution to
economic growth, employment creation, social cohesion, poverty alleviation and
local and regional development. However, a lack of formal credit often hinders
small firms from developing their potential. The credit limitation of small
enterprises is mainly due to the high administrative costs of small-scale
lending, asymmetric information, the high risk attributed to small firms, and their
lack of collateral. The fact that small enterprises often receive less finance or
face worse conditions than larger firms can put them at a competitive
disadvantage and will seriously harm long-term growth and development through
under-investment, a waste of entrepreneurial resources, a reduction of
productivity and a lower growth rate.
For small and micro enterprises, the limits under the credit guarantee scheme
which gives access to working capital and other financial needs have been
doubled to Rs.10 million.

There are an estimated 13.4 million micro and small enterprises (MSEs) in
the country at the end of March 2009, providing employment to an
estimated 32.3 million persons. The MSE sector contributes about 39% of
the manufacturing sector output and 33% of the nation's exports. Of all the
problems faced by the MSMEs, non-availability of timely and adequate
credit at reasonable interest rate is one of the most important.

The Government attaches the highest priority to supporting the medium, small
and micro enterprises (MSMEs) sector which is critical for employment
generation. To facilitate the flow of credit to MSMEs, RBI has announced a
refinance facility of Rs.7000 crore for SIDBI which will be available to support
incremental lending, either directly to MSMEs or indirectly via banks, NBFCs and
SFCs.
The following steps are being taken.
(a) To boost collateral free lending, the current guarantee cover under Credit
Guarantee Scheme for Micro and Small enterprises on loans will be extended
from Rs.50 lakh to Rs.1 crore with guarantee cover of 50 percent.

(b) The lock in period for loans covered under the existing credit guarantee
scheme will be reduced from 24 to 18 months, to encourage banks to cover more
loans under the guarantee scheme.

(c) Government will issue an advisory to Central Public Sector Enterprises and
request State Public Sector Enterprises to ensure prompt payment of bills of
 MSMEs. Easing of credit conditions generally should help PSUs to make such
payments on schedule.
sector. Both the existing and the new enterprises are eligible to be covered
under the scheme.

Analysis of Stimulus:

In wake of the economic slowdown and the stimulus package announced by the
Government of India, CII conducted a snap poll to analyse the impact of various
initiatives, announced as part of the first & second stimulus packages on the
Micro, Small & Medium Enterprises (MSMEs). The findings of the snap poll
revealed that as part of the First stimulus package, the Reduction in CENVAT by
4 %, followed by Interest rate cut of 0.5% for small and 1 % for micro enterprises
by PSU banks, Export support by interest subvention of 2 %, Reduction in lock in
period under Credit Guarantee scheme from 24 to 18 months and Additional
Plan Expenditure of Rs 20,000 crores, will have a beneficial impact for the
MSMEs.

I. Bank credit to MSMEs increases by 26% to Rs.1,91,307

crore as on 31st March 2009:

Credit to Micro and Small Enterprises

Source : rbi.org.in (Amount in Rupees crore)

Last Reporting Public Sector Private Sector Foreign Banks All Percentage
Friday of As on the Banks SCBs of MSE Credit to
March Banks Net Bank
Credit for SCBs*

1 2 3 4 5 6

2007 1,02,550 13,136 11,637 1,27,323 7.2

 2008 1,51,137 46,912 15,489 2,13,538 11.6

2009(P) 1,90,968 47,916 18,188 2,57,072 11.4

* : As percentage of ANBC or credit equivalent of OBE, whichever is

higher, from 2008 onwards. P : Provisional
Note: With effect from April 30, 2007, small scale industries have been redefined as MSEs.

250000
To facilitate the promotion and development of micro, small and medium
enterprises (MSMEs) and enhance their competitiveness, the Government
announced a ‘Policy Package for Stepping up Credit to Small and Medium
Enterprises (SMEs)’ on 10th August 2005 which envisages public sector banks to
fix their own targets for funding of MSMEs in order to achieve a minimum 20 per
cent year-on-year growth in credit to the MSME sector.
 These have resulted in increasing the outstanding credit to micro and small
enterprises sector from public sector banks from Rs. 1,51,137 crore as at the end
of March, 2008 to Rs.1,91,307 crore as at the end of March 2009.

Also as part of the First stimulus package the initiatives such as MSME sector
refinance facility of Rs 7,000 crores, PSEs and Government departments to pay
promptly to MSMEs, RBI Steps to ease liquidity by reducing repo, reverse repo
and CRR, Public sector banks agreed to enhance working capital by 20%
payable in one year with six months moratorium and extension of the Credit
Guarantee from Rs 50 lacs to Rs 1 crores, would immensely contribute towards
easing the liquidity for the MSMEs.

Credit to Sick Micro and Small Enterprises

Source: rbi.org.in (Amount in Rupees crore)

End- Total Sick Potentially Non-viable Viability yet to Units put under
March Units Viable be Decided Nursing
2008
No. of Amount No. of Amount No. of Amount No. of Amount No. of Amount
Units Out- Units Out- Units Out- Units Out- Units Outstanding
standing standing standing standing

1 2 3 4 5 6 7 8 9 10 11

2006 1,26,824 4,981 4,594 4981,17,148 4,141 5,082 342 915 234

2007 1,14,132 5,267 4,287 4281,09.011 4,757 834 82 588 269

2008 85,186 13,849 4,210 247 75,829 13,462 5,147 140 1,262 127

II. Performance Evaluation of MSMEs due to Stimulus

Acc. To Economic reports and official statistics of the GOI and other international
Development agencies & Quarterly reports from SIDBI and all PFIs & Reports
byinternational rating agencies on SIDBI and all PFIs & Central Bank statistics
the position of MSMEs In India is as follow
1. 5% increase in number of MSMEs established over
the next 3 years (2008 baseline: 12.8 million MSME units)
2. 5% increase in MSME sector employment over the next 3 years (2008
baseline: 42 million people employed in the MSME sector)
3. 10% growth in number of MSMEs receiving term financing through this
project starting from 2010 (2008 baseline for Indian banking sector: 17%)
4. 20% increase in direct lending to MSMEs by SIDBI and the PFIs and
overall increase in their MSME portfolio (FY2008 baseline for SIDBI: 37%)
5. At least one successful commercial debt finance or bond issue in
international capital market by an Indian commercial public sector bank
(2008 baseline: Nil)
6. Number of successful applications by low income women entrepreneurs at
SIDBI and SFMC branches increased annually by 20% year (2008
baseline: 5 million)

Cut in Duty of Naphtha for use by power sector:

To provide relief to the power sector, naphtha imported for generation of
electric energy has been fully exempted from basic customs duty. This
exemption will be available up to 31.03.2009. Notification No.128/2008-Customs
dated 07.12.2008 has been issued in this regard

Analysis of Stimulus
National Thermal Power Corporation (NTPC Ltd) says it has generated more
power in its gas-based power plants by increasing the use of naphtha, which is
cheaper, in place of liquefied natural gas, (LNG) as global demand and prices
slid amid the economic slowdown. But sustained use of naphtha would result in
high maintenance costs at NTPC plants and reduce their longevity, said the
state-owned utility, which boosted the efficiency of its gas-based power projects
by 46% through increased use of naphtha.

“Our aim is to generate power at the cheapest price, with the ultimate beneficiary
being the consumer. However, naphtha use will lead to an increase in
maintenance costs,” said R.S. Sharma, chairman and managing director.While
NTPC used to buy 1,500kl of naphtha per day when its plants were operating at
50% efficiency in June this year, it is currently buying 3,300kl of naphtha a day to
raise the efficiency of its gas-based plants to 73%.“The way crude oil prices have
dropped, naphtha prices have also dipped and are expected to come down to
2002-03 levels. This has put pressure on LNG prices,” Sharma said.
NTPC’s total gas requirement is 17 million standard cu. m per day (mscmd) for
its gas-based capacity of 3,955MW. Besides, it also has a 1,480MW gas-based
power plant through a joint venture.With Nymex crude oil prices coming down to
$55.40 (Rs2,767) per barrel from a high $145.31 per barrel on 3 July this year,
both LNG and naphtha prices have also declined from a high of $21 per million
British thermal units (mBtu) and $28 per mBtu to $15 per mBtu and $9.5-10 per
mBtu, respectively.
So the figure clearly denotes the rise of import of naphtha in Dec 2008 over
Nov 2008 due to cut in duty of Naphtha.

Export duty on iron ore fines eliminated:

The export duty of 8% on iron ore fines has been withdrawn while the rate
of export duty on iron ore lumps has been reduced from 15% to 5% ad
valorem.
Notification No.129/2008-Customs, and Notification No.130/2008-Customs both
dated 07.12.2008 were issued in this regard here today.

Export duty in iron ore fines amended to INR 200 per tonne with effect from
October 31st 2008 and further to 8% advalorem with effect from November 7th
2008. The export duty on iron ore fines was subsequently withdrawn whereas
export duty on all other varieties of iron ore was reduced to 5% advalorem with
effect from December 7th 2008.
Analysis of stimuli:

Out of India's annual iron ore production of more than 200 MT, about 50 per cent
is exported. ron ore exports increased 17 per cent to 12.6 MT in February 2009
from 10.8 MT in the same month a year ago, owing to a moderate revival in
demand from Chinese steel producers, as per the latest data compiled by a
group of top Indian mining firms.Earlier, according to a study, with the rise in
demand for steel in China, India's iron ore exports went up by 38 per cent to
reach 13.6 MT in December 2008 against 9.8 MT in December 2007. Around 50-
60 per cent of India’s iron ore is exported to China.

The Federation of Indian Mineral Industries (FIMI) has revealed that in December
2008, Indian iron ore exports recorded a remarkable increase of 38%, reaching
13.6 Million Tonnes from 9.8 Million Tonnes in December 2007, as reported by
Indopia.
During April-December 2008, exports declined by 5.4% to reach 64.47 Million
Tonnes from 68.15 Million Tonnes recorded during the same period in 2007.
During the first half of December 2008, iron ore exports from India plunged 3.8%
on YOY basis.

The iron ore exports from India bounced back in December 2008 following a
decline since May 2008. This is primarily attributed to the rising demand from the
Chinese buyers. Earlier, exports to China were growing slowly since May as the
Chinese ports were piled up with the previous stocks. Moreover, the demand
hampered as several steel mills closed down in accordance to the Middle
Kingdom’s reduced industrial operations to bring down the pollution level for the
Summer Olympics. But now, with the reopening of some steel mills in China, iron
ore demand is surging again.

Further, the incentives announced by the Indian government to increase the

overseas shipments also pushed the exports up. The government announced to
cut the export duty on iron ore, bringing it to 0%, whereas duty on lumps was
reduced by 10 percentage points to 5%. This boosted the exports. Reduction in
railway freight was also announced by the Indian government, which further
added to the growth of India’s iron ore exports.

The recovery shown by Indian iron ore exports made the figure for fiscal year
2008-09 appear relatively respectable. Earlier, the exports were predicted to
decline by nearly 50% as compared to 104 Million Tonnes in fiscal 2007-08.
However, now exports are expected to fall 25%.

According to a Research Analyst at RNCOS, “Out of its annual production of

207 Million Tonnes, India exports about 104 Million Tonnes of iron ore. Increase
in exports of iron ore is proving highly profitable for the Indian exporters.
However, situation was quite unfavorable till few months back when economic
recession and high exports tariffs started to show worldwide.” Indian Iron Ore
Exports Shine, 2009 Forecast Re-evaluated

The Federation of Indian Mineral Industries (FIMI) has revealed that in

December 2008, Indian iron ore exports recorded a remarkable increase of 38%,
reaching 13.6 Million Tonnes from 9.8 Million Tonnes in December 2007, as
reported by Indopia.

During April-December 2008, exports declined by 5.4% to reach 64.47 Million

Tonnes from 68.15 Million Tonnes recorded during the same period in 2007.
During the first half of December 2008, iron ore exports from India plunged 3.8%
on YOY basis.

The iron ore exports from India bounced back in December 2008 following a
decline since May 2008. This is primarily attributed to the rising demand from the
Chinese buyers. Earlier, exports to China were growing slowly since May as the
Chinese ports were piled up with the previous stocks. Moreover, the demand
hampered as several steel mills closed down in accordance to the Middle
Kingdom’s reduced industrial operations to bring down the pollution level for the
Summer Olympics. But now, with the reopening of some steel mills in China, iron
ore demand is surging again.

Further, the incentives announced by the Indian government to increase the

overseas shipments also pushed the exports up. The government announced to
cut the export duty on iron ore, bringing it to 0%, whereas duty on lumps was
reduced by 10 percentage points to 5%. This boosted the exports. Reduction in
railway freight was also announced by the Indian government, which further
added to the growth of India’s iron ore exports.

The recovery shown by Indian iron ore exports made the figure for fiscal year
2008-09 appear relatively respectable. Earlier, the exports were predicted to
decline by nearly 50% as compared to 104 Million Tonnes in fiscal 2007-08.
However, now exports are expected to fall 25%.

According to a Research Analyst at RNCOS, “Out of its annual production of 207

Million Tonnes, India exports about 104 Million Tonnes of iron ore. Increase in
exports of iron ore is proving highly profitable for the Indian exporters. However,
situation was quite unfavorable till few months back when economic recession
and high exports tariffs started to show worldwide.”

Export duty on steel industry reduced:

India is the fifth largest producer of steel in the world. India Steel Industry has
grown by leaps and bounds, especially in recent times with Indian firms buying
steel companies overseas. The scope for steel industry is huge and industry
estimates indicate that the industry will continue will to grow reasonably in the
coming years with huge demands for stainless steel in the construction of new
airports and metro rail projects. The government is planning a massive
enhancement of the steel production capacity of India with the modernization of
the existing steel plants.

Industry Statistics:
Government targets to increase the production capacity from 56 million tones
annually to 124 MT in the first phase which will come to an end by 2011 – 12.
Currently with a production of 56 million tones India accounts for over 7% of the
total steel produced globally, while it accounts to about 5% of global steel
consumption. The steel sector in India grew by 5.3% in May 2009. Globally India
is the only country to post a positive overall growth in the production of crude
steel at 1.01% for the period of January – March in 2009.
Export:
About 50% of the steel produced in India is exported. India’s export of steel
during April – December 2008 was 64.4 MT as against 9.7 MT in December
2007. In February 2009, steel export increased by 17% to 12.6 MT from 10.8 MT
in the same month last year. More than 50% of steel from India is exported to
China. The Government’s decision to reduce export duty on iron ore lumps from
15% to 5% has given a major boost to the export of steel.
In order to tackle the effects of global financial crisis in the steel sector,
India Government has withdrawn all export duties on steel, reintroduced Duty
Entitlement Pass Book benefits and imposed 5% import duty on iron and steel
items. Hot Rolled Steel has also been brought under restricted category under
Indian Trade Clarification Harmonized System of Coding, so as to regulate its
cheap imports.
The key measures are summarized below:
1. Export duty on steel products withdrawn since October 31st 2008
2 Import duty on steel products re-imposed at 5% from November 18th 2008
3. DEPB on steel items reintroduced since November 14th 2008
4. HR Coil brought under Restricted Category to regulate its imports.

The Indian steel industry entered into a new development stage from 2005–06,
resulting in India becoming the 5th largest producer of steel globally. Producing
about 55 million tonnes (MT) of steel a year, today India accounts for a little over
7 per cent of the world's total production.
India is the only country across the world to post a positive overall growth in
crude steel production at 1.01 per cent for the January-March period of 2009.
The recovery in steel production has been aided by the improved sales
performance of steel companies. The steel sector grew by 5.3 per cent in May
2009.
Significantly, state-owned steel maker, Steel Authority of India (SAIL), which
reported a net profit of US$ 571 million in January-June 2009, has become the
most profitable steel company globally, beating steel majors such as
ArcelorMittal, Posco, Bao Steel and Nippon in the half yearly profits.

Out of India's annual iron ore production of more than 200 MT, about 50 per cent
is exported. Iron ore exports increased 17 per cent to 12.6 MT in February 2009
from 10.8 MT in the same month a year ago, owing to a moderate revival in
demand from Chinese steel producers, as per the latest data compiled by a
group of top Indian mining firms. Earlier, according to a study, with the rise in
demand for steel in China, India's iron ore exports went up by 38 per cent to
reach 13.6 MT in December 2008 against 9.8 MT in December 2007. Around 50-
60 per cent of India’s iron ore is exported to China. India’s export of steel during
April – December 2008 was 64.4 MT as against 9.7 MT in December 2007. In
February 2009, steel export increased by 17% to 12.6 MT from 10.8 MT in the
same month last year. More than 50% of steel from India is exported to China.
The Government’s decision to reduce export duty on iron ore lumps from 15% to
5% has given a major boost to the export of steel

Interest subvention of two percent on export

credit for labor intensive sectors:
India’s textile and clothing exports to the US have declined by over 14% at $1.7
billion in the first four months of 2009 compared to the same period in 2008 due
to slump in demand.

The Government of India has decided to extend Interest Subvention of 2

percentage points w.e.f. June 01, 2009 till September 30, 2009 on pre and post
shipment rupee export credit extended by scheduled UCBs holding AD category I
licences, for certain employment oriented export sectors as under:
(i) Textiles (including Handloom)
(ii) Handicrafts
(iii) Carpets
(iv) Leather
(v) Gems and Jewellery
(vi) Marine Products, and
(vii) Small & Medium Enterprises
India’s textile and clothing exports to the US declined by 14.09% at $1.78
billion in January-April 2009 compared to $2.07 billion in the same period
last year, minister of state for textiles Panabaaka Lakshmi said in a written
reply to a question in Rajya Sabha.
She said the government announced two stimulus packages on 7 December,
2008 and 2 January, 2009 to boost India’s exports, including textile.
The measures announced under these packages include additional
allocation of Rs1,400 crore to clear the entire backlog of Technology
Upgradation Fund Scheme (TUFS), all handicrafts to be included under
Vishesh Krishi and Gram Udyog Yojana and interest subvention of 2% upto
September, 2009.
Meanwhile, in the Budget 2009, the government extended interest subvention
scheme up to March 2010, besides allocating funds worth Rs3,140 crore under
TUFS and Rs397 crore for the Scheme for Integrated Textile Park (SITP).
Having grown by over 11% in the first six months of 2008-09, the textile exports
started falling in October ending the fiscal with overall decline of 10% at $20
billion.
As per estimates, slowdown in the US and the European Union, which account
for 60% of the country’s textile exports, has caused the sector go through rough
times in the form of falling shipments and job loss for over five lakh people in the
last few months.
The industry is the second largest employer after agriculture, employing 35
million people.

Analysis of stimulus
Due to the global financial crisis, India's export credit as a percentage of net
banking credit has shown a declining trend, in turn impacting the country's trade,
the Economic Survey has showed.
Export credit as a percentage of net banking credit fell from 5.5 per cent as on
March 28, 2008 to 4.6 per cent as on March 27, 2009 and further to 4.1 per cent
as on January 15, 2010, it said.
The outstanding export credit as on March 28, 2008 was Rs 129,983 crore, a
growth of 23.9 per cent over the previous year. But from then on the downward
trend started.
The export credit as on March 27, 2009 was Rs 1,28,940 crore, a fall of 0.8 per
cent from the previous year. On January 15, 2010, it was Rs 1,24,360 crore, a
decline of 3.6 from the March 2009 figure.

140,000

120,000
 7
Incentives for loans on housing:
Housing is a potentially very important source of employment and demand for
critical sectors and there is a large unmet need for housing in the country,
especially for middle and low income groups. The Reserve Bank has announced

6 5.8
that it will shortly put in place a refinance facility of Rs.4000 crore for the National
Housing Bank. In addition, one of the areas where plan expenditure can be
increased relatively easily is the Indira Awas Yojana. As a further measure of
support for this sector public sector banks will shortly announce a package for
borrowers of home loans in two categories: (1) upto Rs.5 lakhs and (2) Rs 5 lakh-
Rs 20 lakh. This sector will be kept under a close watch and additional measures
would be taken as necessary to promote an accelerated growth trajectory.

Special Schemes for Housing Loans:

5
The Public Sector Banks have decided to offer the following two schemes for
home loan borrowers. The Schemes will be applicable to all new Housing Loans
availed upto 30th June, 2009 and shall not apply to swapping of loans.

I. Loans up to Rs.5 lakh for a maximum period of 20 years

(I) The interest rate will not exceed 8.5 % per annum for the first 5 years. Should
there be a home loan product at a lesser rate, that bank will match this rate for
products under their scheme. The rate of interest shall be reset after 5 years from
the date of drawal of the first installment and the borrower will then have the
option for going for a fixed rate or a floating rate of interest.
(ii) A margin of 10% only will be required.
(iii) There shall be no processing charges.
(iv) There shall be no pre-payment charges/penalty.
(v) Free Life Insurance cover for the entire amount of outstanding loan will be
provided to the borrower.

II. Loan from Rs.5 lakh to Rs.20 lakh for a maximum period of 20 years
(i) The interest rate will not exceed 9.25% per annum for the first 5 years. Should
there be a home loan product at a lesser rate, that bank will match this rate for
products under their scheme. The rate of interest shall be reset after 5 years from
the date of drawal of the first installment and the borrower will then have the
option for going for a fixed rate or a floating rate of interest.
(ii) A margin of 15% only will be required.
(iii) There shall be no processing charges.
(iv) There shall be no pre-payment charges/penalty
(v) Free Life Insurance cover for the entire amount of outstanding loan will be
provided to the borrower.

Analysis of Stimulus:
1. On Rate Of Interest:
On December 22, Public sector banks had brought cheer to small home loan
seekers by cutting rates last week under a new package aimed at stimulating
demand in the retail housing sector.

Loans up to Rs 20 lakh will now be available at 8.5-9.25 per cent a year for
tenures up to 20 years.The offer will be valid only for new loans up to June 30,
2009. Currently, the interest rate on these loans average around 10 per cent for
most PSU banks.

HDFC, India’s largest housing finance company, will offer floating

interest rate home loans of up to Rs 20 lakh, and above Rs 20 lakh at 10.25 per
cent and 11.25 per cent respectively with effect from December 22. Public sector
banks had reduced their rates to 8.5-9.25 per cent earlier this week, for home
loans up to Rs 20 lakh. Currently, HDFC, irrespective of the quantum of home
loan, charges an average floating interest rate of 11.75 per cent.
The 50 basis points reduction in HDFC’s retail prime lending rate (RPLR) to 14.5
per cent will also benefit the existing borrowers. Since all floating rates are linked
to RPLR, existing borrowers, depending on their profile, will now pay interest
rates between 11 and 12.25 per cent, that is, 225-350 basis points below RPLR
of 14.5 per cent.

Comparatively, LIC Housing Finance, which cut interest rates on home

loans with effect from December 17, is offering floating interest rate loans a tad
cheaper. A home buyer can avail himself of loans up to Rs 20 lakh for five-year
tenure at 9.25 per cent. Loans of more than five years duration are available at
9.75 per cent.
For loans above Rs 20 lakh, LICHF floating interest rate home loans will vary in
the 11-11.25 per cent range, depending on the profile of the customers. Before
the revision, the company had an uniform lending rate of 11.5 per cent
irrespective of the amount and the duration.
2. On Market For Home Loan
The market for home loans had buzzed again. Both the leading players State
Bank of India (SBI) and Housing Development Finance Corporation (HDFC) have
seen a significant improvement in their loan approvals during the first half of this
financial year 2009-10.
While for SBI, approvals of home loans has reportedly increased by 25% to
Rs 11,000 crore for the first half of the financial year, 2009-10 compared to
the corresponding period last year, for HDFC, approvals have gone up 18%
at Rs 28, 418 crore compared to Rs 24,180 crore during the corresponding
period last year. SBI is slated to announce its results today.
Country’s largest bank expects a growth of 30% in loan approvals by the end of
this year. It expects to sanction around Rs 25,000 crore by the end of this
financial year while HDFC is planning to grow in both approvals and disbursals
by 20% during the current year.
The return of strong numbers in the home loan market is a result of renewed
buying interest by the middle class, after the setback of 2008-09. Developers are
making a pitch for affordable housing that is attracting buyers. The softening of
interest rates has also led to the rise in demand. The current floating rate for
HDFC stands at 8.75% for loans up to Rs 15 lakh, 9% for loans in the range of
Rs 15 lakh to Rs 50 lakh and for loans above Rs 50 lakh, the interest rate is
9.5%. The numbers will also signal a return of better economic performance in
the economy that has seen consumer confidence ebbing for the last two
quarters.
Between them, State Bank of India and HDFC make up for more than 50% of the
market for home loans. HDFC accounts for about a third of the market. The rest
of the market share is divided between housing finance companies and other
scheduled commercial banks. Despite being a late entrant, SBI has rapidly
climbed the market share ladder by aggressively pitching its low interest rates
that start at 8%.
 Full refund of service tax paid by exporters to foreign
agents
Representations have been received from exporters, seeking clarification
whether ten per cent of free on board (FOB) value of export goods allowed as
foreign agency commission vide Notification 41/2007-ST dated 06/10/2007 as
amended, has been reduced to one per cent vide Notification 18/2009-ST dated
07/07/2009 .

Refund of Actual Service Tax paid on Foreign Agency Commission

Cap on foreign agency commission has been raised from 2% to 10% vide
Notification No. 33 2008-ST dated 7th December 2008. Against this, exporters
made following requests:
• Cap on agency commission should be removed.
• Notification No.17-2008-ST dated 1/4/2008 covers foreign agency
commission for agents located abroad only. This may also include agents
of foreign buyers / buying houses located in India for purposes of refund of
service tax.
• The stipulation that refunds must be claimed within ‘6 months’ (as per
Notification No. 32-208-ST dated 18th November 2008) from the date of
export, should be done away with for agency commission in particular
since payments to agents are made after receipt of remittance.
Member (Service Tax) promised to examine these requests but stated that as per
the Notification service tax on foreign agency commission to agents of foreign
buyers / buying houses located in India was not refundable. on this, FIEO
suggested that refund of service tax to agency commission paid to principals of
foreign agents located in India should be considered. FIEO further suggested
that the time limit for filing service tax claim should be six months from the date of
payment of service tax or realization of export proceeds, whichever is later.
The current rate of service tax being ten per cent and the maximum allowable
limit of foreign agency commission being ten percent of FOB, one percent of the
FOB value of export goods is the maximum exemption of service tax. To settle all
doubts to rest, for the purpose of service tax refund, maximum allowable foreign
agency commission on export goods continues to be at the pre-budget level of
ten percent of the fob value of export goods till further changes are notified.

Analysis of Stimulus
Service tax refund fails to cheer exporters
DESPITE the continuous increase in the list of services for which
exporters would be given refunds, many exporters were not enthused. The
exclusion of exporters claiming duty drawback (a scheme reimbursing exporters
a part of the duties on inputs) from getting refunds of service tax has
disappointed a large section of exporters. Moreover, the mandatory requirement
of registration of exporters with the excise department for claiming refunds and
other procedural snarls has given rise to complaints, especially from merchant
exporters. The restrictive clauses in the refund provision of service tax on
commission paid to foreign agents has also done its bit in taking the fizz out of
the incentive. Speaking to ET, commerce department officials pointed out that
the government had made provisions of increasing the drawback amount claimed
by exporters by 0.4% of the FOB value of exports, but it is not enough. “In a
number of cases, exporters end up paying much more as taxes on services than
the provision made in the drawback. That is why, exporters are feeling short-
changed,” an official said. According to Delhi Exporters Association president SP
Agarwal, a number of services like courier are not related to the export value of
goods. “There is no justification for clubbing service tax refund with duty
drawback. We want the government to give all exporters separate refunds for
service tax,” he said. Till date, the finance ministry has passed notification for
refunding exporters taxes paid on 16 services. These include port services,
transport of goods by road and railways, general insurance, technical testing &
analysis, storage & warehousing, business exhibition services and specialised
cleaning services. Taxes on commission paid to foreign agents and banking
charges are the latest addition on the exemption list. However, exemption of tax
on commission paid to foreign agents comes with a rider. The fineprint says the
refund would be based on either the actual amount of service tax paid or 2% of
the service tax on FOB, whichever is lesser. Since exporters of products such as
textiles and pharmaceuticals pay about 10-15% commission to foreign agents, a
12.5% service tax charged on the commission works out to be around 1.8% of
the value of exports. On the other hand, 2% of the service tax on FOB, amounts
to only 0.25% of the value of exports.

Short comings Of Stimulus Package:

When the government announced the first instalment of the fiscal stimulus
package, the general reaction was it is not enough! There was another package
that's expected to. Exporters, left out of the last package, are expected to benefit,
as are auto component manufacturers.

I. Declining export values

Figures for the dollar value of exports during the month of March 2009, point to a
33.3 per cent decline in export values relative to the corresponding month of the
previous year. This is the fifth consecutive month in which the month-on-month
growth rate has been negative, and the one in which the fall in exports has been
the largest.
India’s exports over financial year 2008-09 stood at $168.70 billion which was
just 3.4 per cent higher than in 2007-08. This compares with 23-31 per cent
annual growth rates over the previous four years. Given the structure of India’s
exports, it is to be expected that this deceleration in export growth would have
affected output growth in a range of traditional and modern manufacturing
sectors that have contributed to the export revival of recent years.
The other area where the effect of the crisis is visible is capital inflows. With
foreign investors having to reduce their credit dependence and meet
commitments at home, they have been booking profits or selling assets in
emerging markets to mobilise the requisite funds. This affected India as well
during the last financial year.
 Exports of Item Q1 Q2 Q3 Q4 Full year

Private Final Consumption 4.5 2.1 2.3 2.7 2.9

Expenditure

Government Final Consumption (-) 0.2 2.2 56.6 21.5 20.2

Expenditure

Gross Fixed Capital Formation 9.2 12.5 5.1 6.4 8.2

Net Exports (-) 75.9 (-) 62.1 (-) 75.4 (-) 30.8 (-) 41.2

Year-on-Year Growth Rate (%) Share in GDP (%)

Private Final Consumption 58.0 55.5 57.4 51.4 55.5

Expenditure

Government Final Consumption 9.6 8.3 12.5 13.4 11.1

Expenditure

Gross Fixed Capital Formation 32.2 34.5 30.9 31.6 32.2

Net Exports (-)1.3 (-)10.5 (-) 8.5 (-) 2.9 (-) 5.8

Source: Central Statistical Organisation (CSO).

II. Portfolio Investment

As compared with a net inflow of portfolio investment of $29.4 billion in 2007-08,
India experienced a net portfolio investment outflow of $13.9 billion in 2008-09.
Though direct investment inflows remained high at $33.6 billion, they were lower
than the $34.4 billion recorded in 2007-08, resulting in a total net foreign
investment inflow of just $19.6 billion in 2008-09 compared with $63.8 billion in
2007-08.
Even though there has been a sharp increase in FII inflows in recent weeks,
there is reason to believe that such inflows are the result of speculative allocation
 decisions across geographies on the part of investors with limited funds. Since
they reflect attempts to squeeze out as much as possible from still-tepid global
markets, such flows are potentially extremely volatile.

III. Industrial growth. The month-on-month annualized rate of growth

of industry, as reflected by the index of industrial production, points to a sharp
deceleration and subsequent contraction of output in the organized industrial
sector.
As Chart 1 shows, month-on-month rates, which indicated a slackening of
industrial growth during the first two quarters of 2008-09, point to significant
worsening of industrial performance leading to negative growth rates during the
subsequent two quarters.

Activity Financial Year Quarterly Growth Rates (y-o-y): 2008-09

2007-08 2008-09 Q1 Q2 Q3 Q4
(Apr-Jun) (Jul-Sep) (Oct-Dec) (Jan-Mar)

Agriculture 4.9 1.6 3.0 2.7 (-) 0.8 2.7

Industry 7.4 2.6 5.1 4.8 1.6 (-) 0.5

Services 10.8 9.4 10.0 9.8 9.5 8.4

Overall GDP 9.0 6.7 7.8 7.7 5.8 5.8

Source: Central Statistical Organisation (CSO).

IV. Portfolio capital

The other important means through which the global crisis is possibly affecting
India is through the reversal of portfolio capital flows to the country, which had
been massive during the period of the high, near-9 per cent growth it
experienced over almost five years.
The immediate impact of that reversal was a collapse of the stock market boom
and a depreciation of the rupee. The first of these could have had wealth effects
that affected demand adversely, besides having created cash flow problems for a
number of entities.

If, for example, a firm had borrowed against securities, the fall in the value of
collateral would have given rise to calls that would have stretched their
resources. The other side of this is the greater difficulty firms would face in
accessing credit.

The depreciation of the rupee, on the other hand, would have increased the
rupee costs borne by firms and agents who had borrowed from the international
market in the past and had to meet interest and amortisation commitments in
foreign exchange. Given the sharp increase in private external commercial
borrowing in recent years, this too would have stretched available resources,
affecting demand and production and even threatening bankruptcy.

Finally, all of this would have also affected the state of liquidity in the system and
more importantly the willingness of banks to lend. This would not only have
impacted adversely on firms, but also on credit-financed housing investment,
automobile purchases and consumption.

These credit-financed sources of demand had expanded significantly in recent

years, with advances for such purposes having increased sharply in absolute
terms and as a share of total advances. Hence, the credit retreat (rather than
squeeze) would have played an important role in triggering the recession.

Impact of Stimulus On Government Revenue:

Fiscal Situation of the Central Government (% of GDP)

Item 2007-08 2008-09 2009-10

(Actual) (RE) (BE)

1. Gross Tax Revenue 12.6 11.8 10.9

2. Total Expenditure 15.1 16.9 17.4

Revenue Expenditure 12.6 15.1 15.3

Capital Expenditure 1.8@ 1.8 2.1

3. Fiscal Deficit 2.7 6.2* 6.8

4. Revenue Deficit 1.1 4.6* 4.8

5. Primary Deficit (-) 0.9 2.6 3.0

Source: rbi.org.in * As per provisional accounts released by the

 Controller General of Accounts.
@ Net of acquisition cost of the Reserve Bank’s stake in State Bank of
India.

As a result of fiscal stimulus measures, coupled with the reduction in the tax-
GDP ratio, all the deficit indicators deteriorated sharply and deviated significantly
from the targets stipulated under the Fiscal Responsibility and Budget
Management (FRBM) Rules. The fiscal deficit increased from 2.7 per cent of
GDP in 2007-08 to 6.2 per cent (pre-actual) in 2008-09. Of the increase in fiscal
deficit due to the stimulus measures (3.5 per cent of GDP), a major portion (3.3
percentage points) has been on account of increase in expenditure. The revenue
deficit also went up from 1.1 per cent of GDP in 2007-08 to 4.6 per cent in 2008-
09. The primary surplus in 2007-08 turned into a deficit in 2008-09.

The consolidated fiscal deficit of the States for 2008-09 is expected to have risen
to 3.0 per cent of GDP taking the estimated combined deficit of the Centre and
the States to 9.1 per cent of GDP, a level last seen in 2002-03. Including the
issuance of bonds to oil marketing and fertiliser companies, the combined deficit
for macroeconomic purposes adds up to around 10.9 per cent of GDP in 2008-
09.

Owing to the fiscal stimulus packages as also additional post-budget items of

expenditure, the combined net market borrowings of the Central and State
Governments in 2008-09 were nearly two and

Conclusion
The stimulus package resulted in tremendous pressure on the fiscal deficit,
thereby in part nullifying the beneficial effects.
The various ‘stimulants’ of the package such as the across-the-board cut of four
per cent in VAT, export and Customs duty concessions and full refund of service
tax paid by exporters to foreign agents may well cause a loss of revenue of the
order of Rs 10,000 crore or more. This had, however, made cheaper a whole
range of products, from cars and two-wheelers to steel and appliances, all of
which are experiencing a slowdown in demand.

Add to this the market borrowing of Rs 45,000 crore announced by the

Government, and the fiscal deficit is all set to jump from Rs 1,33,287 crore (or 2.5
per cent of GDP) as estimated in the Budget for 2008-09 to Rs 1,88,287 crore or
3.6 per cent of GDP.