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India plans $4 billion in extra spending

business Updated: Dec 08, 2008 09:03 IST

AP
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To boost India's slowing economy, the government plans to spend an additional $4 billion, cut the value-added tax and take steps to help exporters, small businesses and textile manufacturers.

The Prime Minister's Office also said Sunday that a state-run financing firm will be allowed to issue $2 billion worth of tax-free bonds to finance infrastructure projects.

"The government is keeping a close watch on the evolving economic situation and will not hesitate to take any additional steps that may be needed to counter recessionary trends and maintain the pace of economic activity," the Prime Minister's Office said in a statement.

Sunday's announcement came after the central bank on Saturday slashed key interest rates by a full percentage point. The benchmark repo rate, at which the central bank makes short-term loans to commercial banks, was lowered from 7.5 percent to 6.5 percent _ the lowest since June 2006 and down from an October high of 9 percent. The reverse repurchase rate, the rate at which it borrows from commercial banks, was cut from 6 percent to 5 percent to encourage banks to lend more to consumers.

India's economic growth skidded to 7.6 percent last quarter _ off from 9.3 percent in the third quarter of 2007_ and exports shrank in October for the first time in seven years.

With a ballooning fiscal deficit, India can do far less than a country like China _ which last month announced a $586 billion stimulus package _ to spend its way out of an economic slump. Citibank said in a report Thursday that it expects India's deficit in this fiscal year will swell from 6 percent to 8.6 percent of its gross domestic product _ far higher than the government's target.

The government said Sunday that spending for the remaining four months of the fiscal year would total $60.2 billion. The government recently announced plans to float $9 billion worth of bonds, which some worried would crowd out other borrowers from an already lean market.

Business leaders had hoped the government would do even more. "The fiscal package is pointing in the right direction, but could have done even more of stimulation to increase the growth trajectory," Amit Mitra, secretary general of the Federation of Indian Chambers of Commerce and Industry, said in a statement Sunday.

Last week, Commerce Minister Kamal Nath told reporters the government would be unfurling a series of stimulus measures, but that the details and timing of the measures were unclear.