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More room for stimulus - Views on News from Equitymaster
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  • Mar 23, 2009

    More room for stimulus

    As governments across the developed world contemplate on printing currencies to evade a prolonged recessionary cycle, we are probably better off. That is because we have more headroom to cut interest rates and take recourse through monetary policy measures even as fiscal measures stand deferred until the elections. The Planning Commission deputy chairman Mr. Montek Singh Ahluwalia has indicated that while the new government will almost certainly continue the fiscal stimulus policies, the Reserve Bank of India (RBI) will in the meanwhile drive policy rates to levels required to revive investment and spur consumption in Asia's third-largest economy.

    It must, however, be understood that be it by way of printing currencies or lowering interest rates, the impact that these liquidity pumping measures will have on the economy will be similar. If the fact that the headline inflation level (measured in terms of WPI in India) is heading towards zero is the rationale behind Mr. Ahluwalia's indication, excessive liquidity may fail to relieve the inflationary pressure at the consumers' level (measured in terms of CPI) which is still in double digits.

    Indian IT majors vie for US$ 6 bn government projects
    Its 'home sweet home' for the big boys of Indian IT. While there is a slump in demand from cash-strapped global customers for new technology services, the domestic market is increasingly looking good for these IT players. Particularly, with several big deals from the government up for grabs, with contract sizes matching the ones available overseas.

    The government departments, now taking the nascent steps to become technologically equipped, have plans to spend as much as US$ 6 bn on IT projects. This number is only set to increase with the central and several state governments planning to introduce e-governance and digitise everything from land records to tax filing. Companies such as TCS, HCL Tech and Wipro have already won significant government business in recent months, while Infosys has recently bid for a railway project related to creating a Locomotive Management System and ERP implementation.

    But what may dampen the spirits of the IT companies looking for a share of the pie is the long time frame for government project approvals. As per Nasscom, three years is the typical time frame for such projects. Case in point being the Rs 10 bn project for digitising passport records, which took the ministry of external affairs almost three years to conclude and was finally awarded to TCS.

    Empty shop floors bring back memories of Great Depression
    If the financial turmoil was not enough, the rapid decline in manufacturing activity the world over has spread global anxiety with regard to the longevity of the economic slump. The depth and speed of the plunge in manufacturing activity is bringing back memories of Great Depression for several economists.

    As per the International Herald Tribune, in Europe where manufacturing accounts for nearly 20% of GDP, industrial production is down 12% YoY from a year ago. Even in China, which is called the workshop of the world, production growth has slowed and exports have fallen by nearly 25% resulting in millions of factory workers being laid off. India's manufacturing sector, which accounts for 16% of her GDP, recently recorded its first quarterly production decline in more than a decade.

    Since April 2008, despite tax cuts and a US$ 64 m stimulus package, Indian textile makers have slashed half a million jobs. Although the US is perceived to be relatively less dependant on its manufacturing activities, the same still contributes two-thirds of US exports. Lesser production of defense equipments, locomotives, medical devices, pharmaceuticals and some high-tech products are expected to hurt US' growth prospects.



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