WORLD OF CRISIS

Dec 4, 2008

Indian Govt readies Rs 75k cr economy booster dose

A high-level committee headed by prime minister Manmohan Singh is close to finalizing an economic stimulus package that is likely to be announced by the end of this week. The committee, which includes industry minister Kamal Nath, RBI governor D Subba Rao and planning commission deputy chairman Montek Singh Ahluwalia, met on Tuesday as well as Wednesday.

The package would add up to around Rs 75,000 cr, including use of up to $10 billion of forex reserves for funding infrastructure projects, lines of credit to banks and allowing non-banking financial companies (NBFCs) to access foreign loans, sources told.

Apart from this general stimulus package, separate package are likely to be announced for the textiles and real estate sectors - both badly hit and labour-intensive - according to the sources. Ahluwalia has for long been pushing the idea of using the RBI's forex reserves to fund infrastructure and that proposal is finally being accepted. Under the proposal now being finalized, RBI will use up to $10 bn from its reserves to buy bonds issued by foreign subsidiaries of the Indian Infrastructure Finance Corporation Ltd (IIFCL). The subsidiary will then bring this money into India and the parent company will use the rupee resources thus generated to lend to infrastructure projects.

The scheme is being seen as serving several purposes apart from giving IIFCL more funds to lend to infrastructure. First, when IIFCL sells the dollars back to RBI, the central bank will end up adding to the supply of rupees in the system, thus easing liquidity. Second, dollars that would otherwise have gone back to the US to buy US treasury bills will remain in India, thereby adding to the supply of the greenback and help in counteracting the depreciation of rupee.

It is proposed that IIFCL will use this money to lend to banks at 9%. Banks will on-lend it to companies executing infrastructure projects at around 11%. However, in this case banks want government to ensure viability of such projects since a two percentage point spread would otherwise not make commercial sense for them.

Apart from this, RBI will be asked to extend a line of credit of Rs 10,000 cr to the Small Industries Development Board of India (SIDBI) to lend to small scale units at 8%. RBI will lend these funds at about 6% to SIDBI.

A similar Rs 10,000 cr line of credit will also be opened by RBI for the National Housing Bank (NHB), which provides refinancing facilities to housing finance companies. NHB will be asked to lend to housing finance companies at rates of around 6-7% so that they can provide home loans to the ultimate consumers at around 9%. This, it is expected, will help revive the demand for housing that has gone down sharply in recent months.

The proposal to allow NBFCs to access external commercial borrowings (ECBs) is also likely to come through. The government believes that some NBFCs have credit lines tied up with foreign lenders and could easily bring in money if they are allowed to do so. The fact that in most such cases the money is being raised for infrastructure projects could have helped in overriding objections that the RBI had to this idea.

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