VZCZCXRO0453
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHNEH RUEHPW
DE RUEHNE #0022/01 0061252
ZNR UUUUU ZZH
R 061252Z JAN 09
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 4934
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC

UNCLAS SECTION 01 OF 02 NEW DELHI 000022 
 
SIPDIS 
SENSITIVE 
 
STATE FOR SCA/INS AND EEB 
USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD 
DEPT PASS TO USTR MDELANEY/CLILIENFELD/AADLER 
DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA MNUGENT 
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN 
 
E.O. 12958: N/A 
TAGS: EAGR ECON EFIN EINV ETRD IN
 
SUBJECT: INDIA PRODS ECONOMY WITH MORE FISCAL AND MONETARY STIMULUS 
 
REFTEL NEW DELHI 00003177 
 
¶1.  (SBU) Summary.  On January 2, the government announced 
additional fiscal and monetary steps aimed at reviving economic 
growth, mainly through lowering the cost of borrowing to banks -- to 
pass on to consumers - as well as easing policies aimed at helping 
hard hit sectors of the economy, especially infrastructure.  This 
second package, less than a month after the first, reflects the 
government's continued concern over signs of a slowing economy.  As 
noted before in reftel, the government's ability to spend its way 
out of an economic slowdown is limited, but it appears to be making 
well-targeted efforts with what tools it has.  The central bank's 
moves to lower the cash reserve ratio (CRR) as well as the two key 
policy benchmarks of the repo and reverse repo rate are meant to 
encourage more lending and add liquidity to the system.  While in 
the right direction, they may still not be enough to encourage banks 
to lend to those whom they see as riskier borrowers.  However, the 
liberalized foreign financing norms are welcome.  End summary. 
 
FISCAL STIMULUS PACKAGE 
----------------------- 
 
¶2.  (SBU) Rumored for several weeks, the government announced a 
second stimulus package late on January 2, coordinated between the 
central bank and the Ministry of Finance.  With little spending 
room, the government focused on easing or removing policy hurdles to 
states' and financial institutions' ability to borrow, as well as 
increasing exporters' refunds on imported inputs.  The package 
provides authorization for state governments to raise additional 
borrowing of $6 billion.  The stimulus also attempts to help revive 
the domestic sales of automobiles, which slumped in October and 
November, traditional festival (and spending) months.  The main 
financial channel for personal automobile financing in India has 
been non-bank finance companies (NBFCs), which have suffered from 
the drying up of their conventional borrowing sources.  The package 
provides them liquidity support as well as permitting them access to 
foreign borrowing from multilateral and bilateral official agencies 
for infrastructure. 
 
¶3. (SBU) The biggest boon of the fiscal package was reserved for 
infrastructure, already a beneficiary of the earlier stimulus 
package and a sign of the continued importance that the government 
gives to maintaining progress in this capital-intensive sector.  The 
package authorizes the government-owned India Infrastructure Finance 
Company Ltd. (IIFCL) to raise an additional Rs 300 billion (roughly 
$6 billion) in tax-free bonds once it has successfully utilized the 
earlier Rs 100 billion authorized under the December package. 
 
¶4. (SBU) The other major boost to infrastructure is through 
liberalization of the government's External Commercial Borrowing 
(ECB) policy and significantly enhanced ceilings on foreign 
investment in corporate debt market.  The January 2 package removes 
the government's caps on permitted interest rate ceilings (also 
called "all-in-cost" ceilings) as well as expanding the end-use 
norms to include integrated townships (planned residential 
communities).  Notably, the government also raised the ceiling on 
foreign institutional investors' investment in corporate debt from 
$6 billion to $15 billion.  Less than three months ago, the cap was 
just $3 billion.  (Note: There are signs that investors are 
responding: net portfolio flows turned positive in November, partly 
because of corporate bond purchases.  Deepening the corporate debt 
market is a key component of project finance for the infrastructure 
sector. End note.) 
 
RBI LOWERS INTEREST RATES AGAIN 
------------------------------- 
 
¶5.  (U) The central bank, the Reserve Bank of India, also announced 
on January 2 that it would lower several of its policy rates.  These 
include a 100 basis point reduction in its repo (liquidity 
injection) and reverse repo (liquidity absorption) rates to 5.5% and 
4% respectively, as well as lowering the CRR from 5.5 to 5%.  The 
RBI noted in its release that it is adjusting its policy stance from 
"demand management to arresting the moderation in growth."  This can 
be taken as a confirmation of what seems to have been the RBI's 
approach since September - that it will continue to monitor and 
respond to perceived liquidity and lending needs in order to help 
re-start the growth momentum.  The central bank can keep open the 
door to further interest rate reductions, as inflation continues to 
 
NEW DELHI 00000022  002 OF 002 
 
 
fall, most recently at a ten-month low of 6.38%. 
 
COMMENT 
------- 
 
¶6.  (SBU) Most estimates of the lag between monetary policy 
implementation and impact on economic activity range around 6-12 
months, so full impact of the near halving of policy rates to date - 
with room for more reductions - may land in the second half of 2009. 
 Most economists feel loosening restrictions on ECBs and foreign 
holdings of corporate bonds will be more meaningful as external 
markets normalize, perhaps in the second half of this year. So 
conditions for domestic market growth, especially investment, carry 
potential for big improvements, even if external markets drag 
behind.  India's economy is being properly targeted by skilled 
policymakers and is encouraging liberalizing behavior; it could 
therefore surprise on the upside. 
 
MULFORD