Duty cuts to boost the economy

Today Finance Minister Mr. Pranab Mukherjee announced the much needed duty cuts in the last day of the interim budget discussion of Parliament.

Excise duty has been reduced from 10 per cent to 8 per cent and the service tax cut from 12 per cent to 10 per cent. And 4% excise cut announced earlier in the stimulus package in December will continue beyond March 31. In addition to these majors, FM also announced Excise duty on bulk cement to be 8% or Rs 230 per metric tonne, whichever is higher and Naptha exempted from customs duty; extends customs duty in Naptha beyond March 31, 2009.

This is much needed action government should have taken before itself. Some people may argue that because of Duty cuts there is revenue loss of around Rs.28000 crore. Ya that's is true in normal conditions. But present conditions require some extraordinary majors to pull back the economy to grow at 7% to 7.5%. Since I think Tax cuts are most effective in boosting the domestic demand as compared to other majors like fiscal & monetary stimulus packages. And in case of monetary relief there will be time lag between the central banker's relaxation & individual banks relaxation which may not as act immediate boosting factor. And the problem with the fiscal stimulus packages, here in India particularly we have implementation problems. And in present scenario governments (Central & States) dont have full fiscal year also for big packages to announce.

These duty cuts are definitely going to help ailing manufacturing units [which are showing negative growth from last couple of months through IIP nos] & service industries. And duty cut on cement is a good relief to the real estate & construction industry which are presently facing the liquidity problems. And if industries transfer these relaxations to consumers then there will be impact on demand side. This domestic demand is India's life line in this crisis time. Since our Indian growth is more of domestic consumption oriented than the export oriented like China. 60% to 65% of our GDP is consumed by Indian population itself. And if governments succeed in boosting the domestic demand then half of the India's problems are solved. Instead of implementing the protectionism policies, government should think about the other alternatives like "Excise & Service Duty Cuts" so that, there will not be international trade retaliations.

And looking at the monetary conditions there is lot of room for reduction in rate cuts by central banker. Since individual banks are keeping there excess money into safe hands of RBI [instead of lending] through Reverse Repo route which is 4% presently. So there should be reduction Reverse repo from 50 to 100 basis points so that banks will look towards the alternatives like lending to Prime Customers.[Since there is risk of increment in the NPAs also] In addition to that there should be reduction Repo rate also so that there is proper balance in the corridor of Repo & Reverse Repo. Ultimately there should be money flow in the economy to boost the economic activities. But I dont think central banker should think of altering the CRR & particularly SLR. Because if we look at the Call Money Ratio it is between corridors of the Repo & Reverse Repo rate, so banks are not facing any problem with the liquidity adjustments between themselves. It is expected that RBI may act by this weekend in easing the monetary majors.

Bottom line:

Lets be hopeful that our Indian economy, counter cycle the present scenario by August/September 2009 with a new government & with its new policies...