Stimulus Package 3.0

More than a week after a lackluster interim budget, the government seems to have wilted under the pressure. In the hours after the budget many of the men involved in framing the budget were on television trying to insist that the interim budget was in tune with the harsh financial conditions that India faces, statements were being thrown out that seemed to suggest that a stimulus package was not required as yet. So what’s changed in eight days that has forced the government to act and announce a stimulus package?

Was it political pressure from the government’s political allies or was it the lack of enthusiasm among the public or was it simply the thumbs down from India’s corporate sector.

Whatever the answer is it is best to view it as a combination of these three reasons. From a larger point of view it is irrelevant what the reasons are because the stimulus package announced by the Ministry Of Finance to improve India’s economy is a much needed one.

It’s the third package in as many months unveiled on a day when S&P put India’s credit rating in the negative.

This stimulus package isn’t exactly a stimulus package. It qualifies as an instrument that will provide stimulus without being too much of a package. The stimulus comes in from the government deciding to cut service tax and excise duty rates by 2%.

Even though the quantum of the rate cut might not seem big, its effects are expected to be mammoth because it will at the end of the day cost the government an amount of almost Thirty Thousand Crore Rupees in revenue.

The rate cut is forecasted to provide a push to the manufacturing sector; it will bring down import costs and the prices of raw materials. Consequently consumer products across the board will cost less which is a boon to the consumer.

The rate cut being applicable to almost all sectors will have a real impact. Everything from durables to soft drinks to even cement is going to definitely cost less. Therefore a much needed demand kickstart will be set in motion.

The excise duty cut being applicable to materials and goods will take time to have its full effect. In urban areas the impact is almost immediate but manufacturers are likely to hold back the benefit of the cut to consumers for some time in other areas.

                         
With the service tax being cut, the impact is immediate with everything from using a credit card to air travel costing less. This will thus make sure that there is some visible proof of the fact that consumers are indeed paying less as a result of this stimulus package.                         

For the stock markets which shrugged off the interim budget, this stimulus package is a welcome move. The day it was announced led the markets to close higher. The trend might well continue provided the global situation is constant.

Now that the stimulus needs have been addressed the focus shifts to the critical issue of job creation.