Will the Stimulus package stimulate??

Finally the stimulus package was announced by the government ... 30K cr or around $6B. The size is insignificant when you look at the packages announced by many other countries. RBI has also announced another repo and reverse repo rate cut by 1%. The idea is to make borrowing costs cheaper and also provide some relief to the industry. The thrust is on infrastructure spending, especially on the highways sector. The chances that it will stimulate demand are negligible.

Government spending is always a key factor in coming out of a recession. And how the government does that to make its spending most effective and also keep a check on fiscal deficits is the key challenge. If the government comes in too soon, it will exhaust its war chest before the real problem hits and the only beneficiaries will be the smarter players who can walk out with their money and profits. It would be fool hardy for the government to spend money on infrastructure when the commodity prices are still too high. Despite the correction most commodity prices are still fairly high since a part of the fall has been negated by the depreciation of the rupee. Creating infrastructure at competitive prices is important to maintain India's competitive edge. Doesn't it seem surprising that the benchmark for 1MW was Rs. 4 crore even in the mid nineties. And even after ten years it remains at pretty much the same level despite most costs having gone up quite significantly. No wonder India could never produce power at internationally competitive rates.

This recession actually provides the government an opportunity to adopt technology in a much bigger way than before. Apart from increasing the transparency levels, the bigger benefit will the higher multiplier effect that technology spending generates. The last five years are ample proof of that. The increased prospects of a buoyant economy will raise the prospects of capital inflows for infrastructure. Private sector spending will be far more efficient that government spending. The qualification norms for any type of direct spending should be stringent to ensure that only solid players are given the business opportunity. Otherwise it will mean money spent on nothing .. fuelling only the parallel economy.

The markets have gone up by more than 300 points. This has nothing to do with the stimulus package announced by the government. It's more because of the sharp jump in all Asian markets. We had mentioned about the commodity stocks sometime back. Their price behaviour subsequently has been in line with our expectations. Globally, the markets are looking for an excuse to give a rally. Further downsides will be likely only in the first quarter of next year. Till then a rally of 10-20% at the index level can be expected. The turning point is likely to be around 10-15 Jan 2009.

Vivek Bhargava.

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