The government on Sunday effected an across-the-board four per cent cut in CENVAT that will bring down prices of cars, cement, textiles and other goods as part of an economic stimulus package that also earmarks an additional Rs 20,000 crore (Rs 200 billion) for infrastructure, industry and export sectors.
In a virtual mini-budget that entails a revenue loss of Rs 8,700 crore (Rs 78 billion) in the next four months, the package seeks to revive the crucial housing, export, automobile, textiles and small and medium enterprises sector to counter the economic slow down caused by the global financial crisis and the recession in the West.
The Central Value Added Tax (CENVAT) on non-petroleum products would down to ten, eight and four per cent for different categories.
The package also contained full exemption from basic customs duty on industrial intermediate naphtha to give relief to power sector and withdrawal of export duty on iron ore fines while cutting down the levy on export of iron lumps from 15 per cent to 5 per cent.
The much-awaited package, set rolling by Prime Minister Manmohan Singh who is also the finance minister, targets power, exports, housing, auto, small and medium industries and infrastructure sectors through additional funding and guarantees that total an amount of over Rs 30,000 crore (Rs 300 billion). The 10-point package contains substantial incentives for the sectors hit by the slowdown, besides allowing India Infrastructure Finance Company Ltd to raise Rs 10,000 crore (Rs 100 billion) through tax free bonds by March as part of efforts to support Rs 100,000 crore (Rs 1,000 billion) programme in the high-way sector.
Unveiling the package, Planning Commission Deputy Chairman Montek Singh Ahluwalia said "the market forces would compel manufacturers in a competitive environment to bring down prices and pass on tax benefits to customers."
Cheering the package, India Inc said it would augur well and car companies led by market leader Maruti announced that they would cut prices. "It is a significant effort to stimulate expenditure in rural infrastructure areas," the industry said.
"The government has been concerned about the impact of the global financial crisis on the Indian economy and a number of steps have been taken to deal with this problem," an official statement said.
The steps taken by the Reserve Bank of India to pump in sufficient liquidity in the financial system are being "supplemented by fiscal measures designed to stimulate the economy. In recognition of the need for a fiscal stimulus the government had consciously allowed the fiscal deficit to expand beyond the originally targeted level."
"It's just a very good stimulus package, if you want one word for it," Planning Commission Deputy Chairman Montek Singh Ahluwalia told reporters while briefing on the package.
"Don't look for one number. Assigning one number is not the right way to look at it," said Ahluwalia, who said it was a significant effort to give a stimulus on expenditure side, especially on rural infrastructure and housing sectors which have the high employment potential.
As part of steps to create demand in the economy that is expected to grow by over 7 per cent, "the total spending programme in the balance four months of the current fiscal year, taking plan and non-plan expenditure together is expected to be Rs 300,000 crore (Rs 3,000 billion)."
The stimulus package announced on Sunday comes on the heels of RBI's monetary measures to ease the cost of funding for the banks, signalling that lenders should lower their interest rates.
"The government has been concerned about the impact of the global financial crisis on the Indian economy and a number of steps have been taken to deal with this problem," an official statement said.
Having assured stability of the financial system, the government said it has focussed its attention on countering the impact of the global recession on India's economic growth.
"The economy will continue to need stimulus in 2009-2010 also and this can be achieved by ensuring a substantial increase in plan expenditure as part of the budget for next year," it added.
The measures also included the government departments being allowed to seek replacement of government vehicles within the allowed budget, in relaxation of extant economy instructions.
"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," it added.