LoanRaja Blog- Personal Finance Guide

When a slowdown comes, can stimulus packages make a difference to India’s current affairs? After the US, EU and China announced infusion of huge amounts of money to get their economies kick started again, it was India’s turn to do the same.

Of course, apart from the economic downturn where everyone talks about India’s current affairs (which in our case was really not as bad as that of the others), we had the terror attacks to add to the gloom. No wonder then, that the Government announcement on Sunday of a Rs 20,000-crore package was met with more than warm enthusiasm. If you have not seen the videos search it on Youtube to know the actual India current affairs.

The initial reaction has been one of optimism. In response to the across the board cuts on Cenvat, automotive, consumer durables and IT hardware industries have already announced intentions to pass on the benefits. So, one can look forward to cheaper cars, white goods and electronic items.

Speaking about current affairs, fuel prices are also down, though only marginally, compared to the global price fall, but indications are that it will go down further.

In the last few months, the RBI has tried every trick in the book to increase liquidity in the market through monetary measures.Even the Sensex, which had refused to come out of its dumps, has brightened up a little.

So what stands as focus during such current affairs? For India the package is focused on three areas; mainly – manufacturing industry, housing and public expenditure. Most manufacturing industries had cut back production.

The 4 percent cut in Cenvat is aimed at setting in motion the cyclical growth process once again. A cut in prices should see an increase in demand, which in turn will lead to an increase in production, an increase in trade and an increase in jobs, increase in amount of money with individuals and therefore an increase in spending power.

It is the same theme that runs through the RBI’s monetary measures to infuse liquidity, though those measures did not see the expected impact.

The affordable housing sector has been one other clear area of focus as banks have already announced cut in rates. Public sector banks are also expected to announce new packages for borrowers of loans in the Rs 5-20 lakh range. This is targeting the middle and low income categories specifically, while also trying to revive the housing industry, which is a large employer of labour.

The largest part of the package is the additional Rs 20,000-crore Plan expenditure. More money is expected to be poured into public infrastructure projects. However, this is the sector that has also attracted the largest amount of criticism. Historically, public expenditure has been equated with leakage, corruption and misuse of funds. Will the money really go into the works as announced is one doubt.

Assuming that this really works out, then public expenditure should spur on private investment and set the entire economy rolling again.

All the new measures will keep the growth rate from slipping below 7 percent. The growth rate has dropped from 9 percent last year, as a result of the global slowdown. In fact, critics have started pointing fingers that the growth rates in the case of Indian economy would be muted in the coming few quarters. What has also added to the skepticism is the fact we are staring at general elections in less than two quarters. Typically, in an election year, you don’t expect to see fire brand economic politics or push towards reforms. However, the recent concluded assembly elections and the public pressure in the aftermath of terror attacks might push the government to speed up its reform process. The economic stimulus package is a reflection of government’s thinking and let us hope that political parties are forced to try their hand at revival of economy for their own good.