India Readies a US$15 Billion Stimulus Package
Dec. 3 – Prime Minister and Finance Minister Manmohan Singh, Commerce and industry minister Kamal Nath, RBI governor D Subba Rao and planning commission deputy chairman Montek Singh Ahluwalia met over the last few days to discuss a Rs 750 billion (US$15 billion) stimulus package for India.
Sources told the Times of India, that of the US$15 billion approximately, US$10 billion of forex reserves would be utilized for funding infrastructure projects, lines of credit to banks and allowing non-banking financial companies (NBFCs) to access foreign loans. Separate packages are also expected to be allocated for the textiles and real estate sectors.
Ahluwalia, who has long being championing the RBI's forex reserves to fund infrastructure may finally have his way, additionally with Manmohan Singh holding both the finance and prime ministerial portfolio’s action might be taken soon. The plan, according to the Times of India is to let the RBI use US$10 billion from its reserves to buy bonds issued by foreign subsidiaries of the Indian Infrastructure Finance Corporation Ltd (IIFCL). The subsidiary will then bring this money into India and the parent company will use the rupee resources thus generated to lend to infrastructure projects.
Economists see the plan having a two pronged benefit. First, when IIFCL sells the dollars back to RBI, the central bank will end up adding to the supply of rupees in the system, thus easing liquidity. Second, dollars that would otherwise have gone back to the U.S. to buy US treasury bills will remain in India, thereby adding to the supply of the greenback aiding to counteract the depreciation of rupee. The proposal also states that the IIFCL will use this money to lend to banks at 9 percent who will in turn lend to companies executing infrastructure projects at around 11 percent.
Apart from this infrastructure stimulus package, the RBI will also extend a line of credit to small scale industries and housing finance banks.
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