India unveiled an extra US$4 billion in stimulus spending to rejuvenate the flagging economy affected by the global financial crisis. The government said it would also ensure a substantial increase in expenditure for next year’s budget.

The new measures follow a 1% point cut in interest rates by India’s central bank to stimulate the economy. The benchmark repurchase rate, at which the central bank makes short-term loans to commercial banks, will move to 6.5% from 7.5%, its lowest level since June 2006 and down from an October high of 9%.

Confidence has been undermined further by attacks in the financial capital Mumbai that killed 163 people, including more than two dozen foreigners.

‘The government has decided to seek authorisation for additional planned expenditure of up to 200 billion rupees (US$4 billion) in the current (financial) year,’ Prime Minister Manmohan Singh’s office said in a statement.

‘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.’

Under the package, the government said that various categories of value-added tax would be cut by 4% to increase spending.

To boost exports, the government announced extra allocation of US$70 million for a host of incentive schemes. Exports fell by 12% in October and the government has cut its export target for the year to US$175 billion from US$200 billion.

The stimulus package also includes measures to boost infrastructure spending, small and medium businesses, and labour-intensive export sectors such as textiles and handicrafts.

The additional expenditure will further expand India’s fiscal deficit, which widened 60% to US$73 billion between April and October from the same period a year earlier. ‘The fiscal deficit will be worse. We don’t have a number on what that will be,’ Montek Singh Ahluwalia, deputy chairman of the government’s planning commission, told reporters after the announcement.

Mr Manmohan Singh, who recently took control of the finance ministry, last week forecast growth of 7.5% for the year to March 2009. Economists say growth could be as low as 6.8% this year and 5.5% the following year. The government said it was concerned about the impact of the global meltdown on its economy.

Amit Mitra, secretary-general of industry body FICCI, welcomed the announcement, saying: ‘It should help in imparting some momentum to the economy to overcome the current slowdown.’ But he added that the government should focus more on exports in the next package.

‘The incremental spending is less than what was originally thought,’ said Sonal Varma, a Mumbai-based economist at Nomura International. ‘Any fiscal stimulus will help alleviate the stress in the economy, but a slowdown is inevitable.’ Source – AFP, Bloomberg