India unveils second economic stimulus plan

[Naveed Yaseen]

NEW DELHI: India on Friday eased foreign borrowing by domestic firms and permitted additional liquidity for the non-banking sector to boost flagging growth in Asia’s third-largest economy.

The second economic stimulus package in less than a month came as India forecast growth of seven per cent for the year to March 2009, but economists say it could be as low as 6.8 per cent this year and 5.5 per cent the following year.

The package also allowed state administrations to borrow up to 300 billion rupees ($6.2 billion) to meet additional expenditure and fund infrastructure projects.

The package raised the ceiling for foreign investments in India from six billion dollars to $15 billion, national planning official Montek Singh Aluwalia told a news conference.

But he warned against expecting any immediate economic turnaround.

“The latest assessment we have is that we should be willing to see growth rates decline in the coming year and an average growth rate of seven per cent would be quite a good performance,” he said.

India’s industrial output shrank for the first time in 15 years by 0.4 per cent in October, after expanding by 12.2 per cent in the same month a year earlier. India’s central bank meanwhile slashed its two key short-term interest rates.

The Reserve Bank of India (RBI) reduced its repo rate, the short term rate at which it lends to commercial banks, by 100 basis points to 5.5 per cent.

It also slashed the reverse repo rate, the rate at which it borrows overnight, to four per cent.

It also unveiled a cut in the cash reserve ratio, the proportion of deposits domestic banks have to keep with the RBI, by 50 basis points to five per cent from January 17.

“These measures will make the new year happier,” Aluwalia said. Experts said the easing of the rates was likely to inject around $4.1 billion into the domestic banking system. The rate cuts were the fourth by the bank in less than three months.

India’s economy has been hit by the global recession and confidence has been undermined further by attacks in the financial capital Mumbai that left 172 people dead, including nine gunmen, in November last year.

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