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Economic package fails to cheer financial firms

Source: PTI
Last updated on: December 08, 2008 18:47 IST
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The stimulus package announced by the government and the Reserve Bank of India will give a small push to the economy, but will fall short of being able to reverse the downturn, which has already set in, financial services firms say.

"These measures are positive but may not be sufficient to reverse the deceleration in growth. Interestingly, the RBI has also stated that there is evidence of economic activity slowing down, particularly in manufacturing and infrastructure as well as services," Citigroup said.

While the weekend's stimulus package and fuel price cuts, coupled with increased public spending in the run-up to the Lok Sabha elections, could act as an antidote, incremental data are discouraging, Citi said.

In the automobile sector, there were alarming contractions in sales, in two-wheelers by 10.2 per cent and commercial vehicle sales by 34.8 per cent in October, it said.

Data for November indicate that several manufacturers continue to see contraction in sales. In retail, footfalls have declined while layoffs across sectors will impact disposable incomes, with a knock-on impact on consumption growth, it said in an analysis.

On the RBI's rate cuts, Citigroup said the central bank is expected to continue to ease its policy rates.

Goldman Sachs said, "Although the moves (the RBI and government's stimulus package) are positive, we do not think they materially alter the growth outlook for the Indian economy. We continue to expect GDP growth to slow to 6.7 per cent in 2008-09 and 5.8 per cent in 2009-10."

Although the stimulus will help specific sectors, the Goldman Sachs report said "we do not think it is material enough to significantly alter the aggregate demand slowdown. We continue to believe India does not have (the) fiscal space to substantially boost slowing demand."

The US bank hoped that reduction in excise duty would be passed on to consumers and help in boosting consumer demand.

On the RBI's move to cut policy rates, Goldman Sachs said it would lead to banks lowering interest rates.

However, since credit spreads remain high, the bank expects more rate cuts by the RBI.

"With the current move, we now expect the central bank to cut the repo rate by another 150 basis points and the reverse repo rate by 100 basis points to bring the corridor to 4-5 per cent," it said.

On fuel price cuts by the Government, Goldman Sachs said it would lower inflation by 45 basis points and accelerate its decline.

Fund house Edelweiss said the steps are in the right direction but are obviously constrained by the current fiscal health of the country as indicated by the relatively small size of the package.

"Equity markets appear to have priced in much of this already and the actual measures may disappoint. However, specific sectors such as auto, real estate, banking, and export-oriented (sector) should react positively," it said.

HDFC Bank said even though the fiscal stimulus package exceeds its expectations, there could be questions on the adequacy of the additional spending measures.

"Rupees twenty-thousand crore (Rs 200 billion) of additional plan spending and infrastructure spending of Rs 10,000 crore (Rs 100 billion) funded through bonds add up to a rather small amount of 0.6 per cent of GDP or about $6 bn. Contrasted with say the $586 bn stimulus package announced by China, the sum looks piffling indeed," it said.

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