After a disappointing interim budget on Feb 16 the Indian Government has announced a third stimulus package much to the relief of industries under the siege of global recession. The news was a bolt from the blue for the markets which was down due to the recent news of salary cuts, unemployment and overall gloom.

The proposals in the budget were;

1. Service tax cut by 2% from 12 to 10 which can help not only establishments but also individuals. Service tax introduced in 1994 for telephone, stock, insurance now extends to approx 100 items as per the latest budget. A reduction in 2% is a welcome relief for all telephone users.

2. Excise tax reduction by 2% which was earlier at 10%.This reduces the prices of IT products other than computers. Further it reduces the price of cement by Rs 60 per metric tonne.

Both the cuts come with a price tag of Rs 30,000 crores. This will further widen the fiscal deficit (when government’s total expenditures exceed the revenue it generates) which is approx around 10% of GDP at present. This throws tantrums on Government’s actual plans to reduce the deficit(accumulated fiscal deficit) in the next financial year. The three packages has cost the exchequer a whopping 70,000 crores. But the net effect is that it stimulates demand in the country which is the right thing during a recession.

Further the FICCI(Federation of Indian Chambers of Commerce and Industry),established in 1927 and headquartered in New Delhi having 1500 corporates and 500 chambers of commerce and business associations, voiced its demand to reduce ;

1. Cash Reserve Ratio (CRR)- It is the amount of funds that the banks have to keep with RBI And used as a tool to drain out excess money from bank. In case CRR comes down money will be available with banks.

2. Repo rates (rates at which banks borrow money from RBI. Reduction in same will allow banks to get cheaper money).

3. Reverse repo rates (rates at which money is transferred from banks to RBI. It can cause reduction of money with banks).

The Government is planning for a common Goods and Service Tax by 2010 uniting all the taxes and avoiding dual taxation.

Will there be another stimulus package? That depends on the government. But the present move will surely provide greater relief for India.

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What is a recession? The generally accepted definition of a recession is two successive quarters of negative Gross Domestic Product (GDP) growth.

It’s a known fact that we are in deep recession, deeper in US, UK and other developed nations as compared to the developing countries. Developing countries are not immune to this, as the consumption and demand from these would be impacted as a result of recession and hence a cascading affect across the globe. China reported 20 million job loss and it’s premiere has been making rounds other side of the world to ensure the ‘doors are not being shut on them..’ India reported 500K plus job losses in textile, jewellery, auto and manufacturing. IT saw a marginal growth, however NASSCOM did lower the growth expectation from 21-24% to 17%, (may be a breather for some in the near  term.)

Defence budget put under scanner, budgets tightened, expansion plans seen the door at a faster pace than one could imagine. Recently Britain, shelved a plan to buy a £13 billion naval warship.

All said and done, we are coming to terms with it and we have no choice.

So why recession?

The right question to initiate a blame game, to blame it all on the financial decisions that grossly went wrong, made by the once gurus of financial world. The same DNA that made them last for more than a century? There’s more to it than that meets the eye.

Let’s go back and glance at our economics books which states product is an accumulation of labour. Unless there is labour there is not going to be any product. Over the last decade, growth in entertainment, luxury, & multiplexes across the length and breadth of the country has out paced the growth in any other industry. There is a mad rush for the latest gadgets, to achieve the zenith of luxury and live as much a comfortable life as one can possibly imagine, hoping that this will continue forever.

Something to ponder and introspect on.

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