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Stimulus package: The need to focus on states
January 06, 2009
The second installment of fiscal stimulus announcement comes a month after the first, and this time in tandem with the RBI's easing of monetary policy announcements.
The major monetary policy measures include reduction in the CRR by 50 basis points, reduction in the repo and reverse repo rates each by 100 basis points.
Global meltdown: Complete coverageThe important among the fiscal stimulus measures include permitting the states additional fiscal deficit amounting to half a percent of GDP, enabling the IIFCL access to funds amounting to Rs 30,000 crore (Rs 300 billion) through tax-free bonds, allowing the developers of integrated townships and infrastructure-dealing NBFCs access to external commercial borrowings, removal of interest rate ceiling on commercial borrowings, increase in the FII limit in corporate bonds from $6 billion to $15 billion, restoration of DEPB to pre-November rates until December 2009 and assistance under the JNURM to buy buses for urban transport systems.
Of course, the impact of monetary easing will depend on actual lowering of lending rates by the banking system and actual increase in borrowing by the business community. Similarly, fiscal measures may not immediately trigger increase in aggregate demand as they may work with a lag.
It is precisely for this reason that the spending departments should prioritise their programmes and work out action plans for implementation.
With these measures, the government has once again shown its proactive approach in fighting the economic slowdown. Indeed, fiscal measures by themselves may not add up to much.
In many ways, additional spending enabled in the two supplementary grants, though they pertain to expenditure commitments of the last year, must be taken as a part of the stimulus package.
The most important exercise required is to prioritise the ongoing projects and speed up their implementation by every government department. The critical question, however, is whether the various government departments are willing to shed their BAU inertia.
Given that the there are only three months left in the current financial year and the code of conduct would come into force once elections are announced, one should not expect any more fiscal stimulus package for the year and the focus should shift to fast implementation. Indeed, there will have to be continuous monitoring of monetary policy and when we have the SLR of 24 percent, it is possible to reduce the CRR even from the present level of 5 percent.
One area where fiscal stimulus package still needs to be worked is at the state level. This is necessary not only because states have co-equal responsibility in providing physical infrastructure and overwhelming role in providing social services, but also their action needs to be coordinated with that of the Centre.
To kick off the states' participation, the Prime Minister should call a meeting of the state chief ministers and impress upon them the need for coordinated action. Besides emphasising prioritisation and speedy implementation of various infrastructure projects and flagship programmes, the Prime Minister could agree to bear half of the cost of implementing the new pay scales.
The author is Director, NIPFP.
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