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.

Image Credit: Cell105

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