India May Raise Spending, Lower Rates After Attacks

By Cherian Thomas

Dec. 3 (Bloomberg) -- India may boost public spending, increase export incentives and cut interest rates to support the economy after the country’s worst terrorist attack in 15 years last week undermined investor confidence, economists said.

The government may establish a fund for investments in roads, power and ports, provide interest subsidies for housing and exports, and reduce the key repurchase rate by as much as 1.5 percentage points to 6 percent, The Economic Times reported today citing a government official it didn’t name.

“India definitely needs to announce policy measures as confidence is shaken after the terror attacks,” said Dariusz Kowalczyk, a strategist with CFC Seymour Ltd. in Hong Kong. “It makes sense to open government coffers and cut rates.”

India’s stimulus package is unlikely to match the $586 billion plan unveiled last month by China, as its debt as a proportion of gross domestic product is three times more. Still, Kowalczyk said India’s economy is more resilient to a global recession as it’s far less dependent on exports than China.

India’s 10-year bonds gained, pushing yields to 6.88 percent, the lowest level since June 2005, at 11:20 a.m. in Mumbai. The benchmark stock index fell 0.3 percent to 8716.01 while the rupee gained 0.4 percent to 49.9550 against the dollar.

Terrorist attacks in Mumbai, which began Nov. 26 at two luxury hotels, a railway terminal and a building housing a Jewish center, lasted for 60 hours, leaving 195 people dead. About 300 people have died this year in India from bomb explosions in markets, mosques, bus stations and theaters.

Consumer Demand

The government, which hasn’t revised its growth forecast after the Mumbai assault, says the economy will slow to as much as 7 percent in the year to March 31, the weakest pace since 2003. Prime Minister Manmohan Singh said last month growth will average 8 percent in the next five years, buoyed by consumer demand, which makes up 60 percent of the $1.2 trillion economy.

China, whose external trade links with the U.S. and Europe are stronger than India’s, is boosting spending to help the economy expand more than 8 percent for each of the next two years. Domestic consumption only accounts for 37 percent of Chinese GDP.

India, whose public debt is 77 percent of the economy compared with 22 percent in China, “has a more distinct lack of funds,” said Sanjay Mathur, a Singapore-based senior economist at Royal Bank of Scotland Group Plc. “Therefore the burden of stimulating growth willy-nilly falls on monetary policy.”

Rate Cuts

Since October, the Reserve Bank of India has cut its repurchase rate by 1.5 percentage points, and reduced the amount of deposits that lenders need to set aside as cash reserves and in government bonds by 3.5 percentage points and 1 percentage point respectively, to stimulate demand.

The Economic Times reported today the central bank may further cut the cash reserve ratio to 4 percent from 5.5 percent. The move will provide more money to lend to commercial banks.

The government also plans to cap interest rates on home loans up to 1 million rupees ($20,048) at 8.5 percent, with the government picking up the tab for the subsidy burden this would place on banks, the paper reported.

“India should not look for quick fixes and worsen the high debt it already has,” said Ramya Suryanarayanan, an economist at DBS Group in Singapore. “It will make the economy more vulnerable. If you use this crisis to push through reforms, such as cutting oil subsidies, that’s ideal.”

Minister Palaniappan Chidambaram, who was moved to the home ministry from finance ministry this week to tackle the threat of terrorism, told Bloomberg News on Nov. 18 that “this is not the year to worry about the budget deficit”.

“This is the year to worry about growth,” Chidambaram said.

To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net