Tuesday, 23 February 2010

The dancing elephant needs support for some more time!

The global recession which started hitting countries from Oct 2008, was a blessing in disguise for the Indian corporates. The world started looking India from different angle. The traditionally conservative banking system was appreciated world over. The regulators shared limelight like never before. It was difficult time but, it brought a lifetime opportunity for Indian behemoths. They became more cautious. They started cutting on cost, deferring capital expenditure, realigning their business and consolidating their operations.

The Indian government provided stimulus package in installments. Rate cuts, plan -unplan expenditure of $60Bn, cut in central VAT, incentives to export industries, refund of service tax paid by exporters to foreign agents, Incentives for loans on housing, Limits under the credit guarantee scheme for small enterprises doubled, Export duty on iron ore fines eliminated, Export duty on lumps for steel industry reduced to five percent.
Largely speaking, Indian economy was never hit by recession. We never neeeded a stimulus package of any sort. But the aggressive move by the government ensured that the interest of SMEs is maintained. The exporters are not hurt significantly due to falling demand and delay in payments. Withdrawal of funds by FII also created a credit crunch situation. India clocked a growth of 6%-7% in the midst of adversity around the world. This was possible due to strong and growing rural demand. The consumer spending has been increasing on month-on-month basis.

No doubt the booster hasnt come for free. The fiscal deficit is close to 12% of GDP. Rate cuts and incentives to boost growth has resulted in inflation. Government has to play a balancing act between maintaining growth and containing the inflation. But, if the stimulus package is rolled back now, it would create a recession like situation in India. Infrastructure projects worth billions are underway. They need extended incentives. Large projects might get delayed and cause cost overruns. Various sectors are still in consolidation phase. The results declared are volatile. Industries are yet to experience stability.

fOoD fOr ThOuGhT: The dancing elephant needs stimulus support till 2nd quarter of the FY2010-11. We are targetting a growth of 8%+ now. So if roll back is done in phased manner, we will have our average growth of 6.5% without hurting any industry. Untimely removal of ladder might enforce few to fall.

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