Doing Business In India

Indian Government has taken a number of steps to minimize the impact of the global financial crisis on the Indian economy. But, is Credit Crunch the only reason why the economy falters? Introducing credit into the system maybe short term measures that would provide immediate impetus, good for stock markets, but for sustained growth we need structural and systematic changes and corrections.

The Government of India and Reserve Bank of India are trying to introduce changes that would address these maladies. These include:

1. Additional plan expenditure upto Rs. 200,000 mn. in the current year mainly for critical rural, infrastructure and social security schemes.
2. An across-the-board cut of 4% in ad-valorem Cenvat rate except for petroleum products.
3. Measures to support exports, housing, Micro, Small & Medium Enterprises (MSME) and textile sectors.
4. India Infrastructure Finance Company Ltd to raise Rs. 100,000 mn. to refinance bank lending for infrastructure projects.
5. Monetary, credit and fiscal Policy- External Commercial Borrowing (ECB):
(a) The ‘all-in-cost’ ceilings on such borrowing would be removed, under the approval route of Reserve Bank of India (RBI);
(b) To facilitate access to funds for the housing sector, the ‘development of integrated townships’ would be permitted as an eligible end-use of the ECB, under the approval route of RBI;
(c) NBFCs, dealing exclusively with infrastructure financing, would be permitted to access ECB from multilateral or bilateral financial institutions, under the approval route of RBI.
(d) In order to give a boost to the corporate bond market, FII investment limit in rupee denominated corporate bonds in India would be increased from US $ 6 bn to US $ 15 bn.
6. Credit flow to the economy:
(a) An SPV to provide liquidity support against investment grade paper to Non Banking Finance Companies (NBFCs) upto Rs.250,000 mn.
(b) An arrangement with leading Public Sector Banks to provide a line of credit to NBFCs specifically for purchase of commercial vehicles.
(c) Credit targets of Public Sector Banks are being revised upward.
(d) Guarantee cover under Credit Guarantee Scheme for micro and small enterprises on loans upto 85% for credit facility upto Rs. 0.5 mn. This will benefit about 84 per cent of the total number of accounts accorded guarantee cover.
7. State Governments will be allowed to raise in the current financial year additional market borrowings of 0.5% of their Gross State Domestic Product, amounting to about Rs 300,000 mn, for capital expenditures.
8. Exports:
(a) Taking into account the fact that the rupee has appreciated nearly four per cent against the dollar since November 2008, it has been decided to restore DEPB rates to those prevailing prior to November 2008. In order to provide predictability and stability of regime in the short term for future contracts, the DEPB Scheme would be extended till 31.12.2009.
(b) Duty drawback benefits on certain items.
(c) EXIM Bank has obtained from RBI a line of credit of Rs.50,000 mn and will provide pre-shipment and post-shipment credit, in rupees or dollars, to Indian exporters at competitive rates.
9. To counter recessionary trends:
(a) Exemptions from CVD on TMT bars and structurals, and from CVD and Special CVD on cement, which were given to contain inflation, are being withdrawn. Full exemption from basic customs duty on zinc and ferro alloys, which was also provided to contain inflation, is being similarly withdrawn.
(b) To release land for low income and middle income housing schemes.
(c) States will be provided assistance for the purchase of buses for their urban transport systems.
(d) Accelerated depreciation of 50% will be provided for commercial vehicles to be purchased on or after 1.1.2009 upto 31.03.09.

One area that the Government needs to look at very closely is the quality of credit that is being extended. In its enthusiasm they should not over extend and end up with another round of credit waivers in the near future (or is this the political far sightedness…who knows). This is a distinct possibility. The road to recovery is long since the global economies are still trying to figure out their bearings.

Vivek Parti, CEO, India Business Database.com, Business Credit Information Company