India's $15B Package: Government Plays 'Santa' to a Prime Economy

"We are going to review this and looking at various measures that can help sustain exports. We are working on this package because this situation was not there last month." - Kamal Nath, India’s Commerce Minister, when quizzed on the issue of improving conditions of exporters.

India's government is feeling generous. In times like these, when the stellar government income of the last fiscal year was squandered in populist measures, a staggered package of around $15 billion dollars is quite enormous, even by Western standards.

A combination of fiscal and monetary policies, some of the key street speculations [at the time of writing] and snippets of the announcement to be made today are:

1. The Street quite early predicted the cutting of key banking ‘repo’ and ‘reverse-repo’ rates. It has, however, kept the other key ratios intact, namely CRR and SLR. The central bank has announced a rate cut of around 100 basis points for the former, standing at 6.5pc.
2. In terms of fiscal measures, it will be a ‘sniper’ and not a ‘shotgun’ approach. The target and the treatment will vary from sector to sector. NBFCs, exports, housing and autos will be the current favorites of the Prime Minister [who incidentally donned the mantle of finance once again]
3. Apart from rate cuts, the much languishing housing sector [NHB] and domestic small scale industries [SIDBI], is speculated to be given an ‘enhancement’ of $1.4 billion and $800 million, respectively.
4. Essentially, the relief measures will be in the form of credit line, which is no less welcomed by the captains of the industry. An across the auto board cut of 2% excise duty will certainly help companies like Eicher and Ashok Leyland.
5. As far as export is concerned, a $400 million export sop is expected. A credit line enhancement of ~$70million for the ECGC [Export Credit Guideline Corporation] is expected. ECGC will be responsible for ‘handing over an umbrella’ to small scale domestic exporting companies.
6. On the infrastructure front, the Street is expecting around $3 billion of ‘budgetary support’. Not only this, but a lot of speculation is rife on a $10 billion ‘stimulus’ through forex loans be provided. This in turn should mightily benefit Unitech, GMR and DLF. A lot of this will be financed through IIFCL [Indian Infrastructure Finance Company Limited].

Analysis

The Indian government has launched a strong three-prong attack on the slowing economy. A combination of monetary and fiscal steps is expected by the street. Yet companies with their stocks heavily beaten, like ICICI Bank (IBN), HDFC (HDB) etc, still have a long way to go to gain back investors' trust and sentiment favor. This package might not stop the inevitable, but it will surely delay it a bit.

But there is an uncertainty hanging in the air, when you consider that Indian coffers are already stretched thin after the benevolence of the former Foreign Minister to the hapless Indian farmers. The term ‘staggered stimulus’ might help to dispel fears, yet the markets will find little to rejoice because it takes time and effort for sentiments to change.