The government and the Reserve Bank of India today announced a second stimulus package for the economy that includes a further easing of liquidity and liberalisation of various rules and regulations, to give a boost to spending and investment.

In order to further ease liquidity and credit flow, the Reserve Bank of India today reduced the repo rate under the liquidity adjustment facility (LAF)  by 100 basis points from 6.5 per cent to 5.5 per cent. It also reduced the reverse repo rate by 100 basis points from 5.0 per cent to 4.0 per cent with immediate effect.

RBI also announced a reduction in the cash reserve ratio (CRR) of scheduled banks by 50 basis points from 5.5 per cent to 5.0 per cent from the fortnight beginning 17 January 2009.

The reduction in the CRR is expected to inject additional liquidity of around Rs20,000 crore into the financial system, RBI said.

While several banks have reduced their lending rates recently, the reduction in the policy interest rates and the CRR will further enable banks to provide credit for productive purposes at ''appropriate'' interest rates, the central bank said.

The Reserve Bank on its part would continue to maintain a comfortable liquidity position in the system, it added.

Besides, the RBI today announced a set of measures, including a further liberalisation of the policy on external commercial borrowing (ECB), under which:

• The 'all-in-cost' ceilings on such borrowing would be removed, under the approval route of RBI;
• To facilitate access to funds for the housing sector, the 'development of integrated townships' would be permitted as an eligible end-use of the ECB, under the approval route of RBI;
• NBFCs, dealing exclusively with infrastructure financing, would be permitted to access ECB from multilateral or bilateral financial institutions, under the approval route of RBI.

These decisions would be reviewed after 30 June 2009, RBI said.

In order to give a boost to the corporate bond market, FII investment limit in rupee denominated corporate bonds in India would be increased from $6 billion to $15 billion.

To further increase the flow of credit to the economy the following measures have been suggested:

• A special purpose vehicle (SPV) will be designated shortly to provide liquidity support against investment grade paper to non-banking finance companies (NBFCs) fulfilling certain conditions. Details will be announced separately. The scale of liquidity potentially available through this window is Rs25,000 crore.
• An arrangement will be worked out with leading public sector banks to provide a line of credit to NBFCs specifically for purchase of commercial vehicles.
• Credit targets of public sector banks are being revised upward to reflect the needs of the economy in the present difficult situation. Government will closely monitor, on a fortnightly basis, the provision of sectoral credit by public sector banks.
• Special monthly meetings of state level bankers' committees would be held to oversee the resolution of credit issues of micro, small and medium enterprises by banks. Department of MSME and the department of financial services will jointly set up a cell to monitor progress on this front.
• The guarantee cover under Credit Guarantee Scheme for micro and small enterprises on loans has earlier been extended from Rs50 lakh to Rs1 crore with a guarantee cover of 50 per cent. It has now been decided to extend the guarantee cover to 85 per cent for credit facility up to Rs5 lakh.
• This will benefit about 84 per cent of the total number of accounts accorded guarantee cover.
• State government will be allowed to raise additional market borrowings of 0.5 per cent of their gross state domestic product (GSDP), amounting to about Rs30,000 crore, for capital expenditures in the current year.
• India Infrastructure Finance Company (IIFCL), which has already been authorised to raise Rs10,000 crore through tax-free bonds by 31 March 2009 for refinancing bank lending of longer maturity to eligible infrastructure bid-based PPP projects, will be accessing the market next week for raising the first tranche of the amount.
• This will enable the funding of mainly highways and port projects on hand of about Rs25,000 crore. To fund additional projects of about Rs75,000 crore at competitive rates over the next 18 months, IIFCL is being enabled to access in tranches an additional Rs30,000 crore by way of tax free bonds once funds raised in the current year are effectively utilised.

A number of steps have been announced to support exports which has been severely hit by the appreciation of the rupee. As a further measure:

• To account for the loss due to currency value changes, it has been decided to restore DEPB rates to those prevailing prior to November 2008. In order to provide predictability and stability of regime in the short term for future contracts, the DEPB scheme would be extended till 31 December 2009.
• Duty drawback benefits on certain items including knitted fabrics, bicycles, agricultural hand tools and specified categories of yarn have also been enhanced with retrospective effect from 1 September 2008.
• In order to address procedural issues, the government has decided to constitute a committee under the chairmanship of the finance secretary and secretaries of the departments of revenue and commerce as members to look into and resolve these issues on a fast-track basis.
• EXIM Bank has obtained a Rs5,000 crore line of credit from the RBI and will provide pre-shipment and post-shipment credit, in rupees or dollars, to Indian exporters at competitive rates.

Other measures designed to counter recessionary trends include:

• Exemptions from CVD on TMT bars and structurals, and from CVD and special CVD on cement.
• Full exemption from basic customs duty on zinc and ferro alloys.
• The centre will also coordinate with the state governments to encourage them release land for low income and middle income housing schemes.
• States will be provided assistance under the JNNURM for the purchase of buses for their urban transport systems, as a one-time measure, up to 30 June 2009,. A scheme towards this end will be announced shortly.
• Commercial vehicles would allowed be accelerated depreciation of 50 per cent for purchases on or after 1 January 2009 and up to 31 March 2009.
• Government will set up a fast track monitoring committee to ensure expeditious approval and implementation of central projects. Chief ministers are being advised to do the same.

These measures together with steps taken earlier constitute a substantial counter-cyclical stimulus in the current year, the release said. Government does not envisage any further measures in the current fiscal year, it added. However, in order to extend the economic stimulus beyond the current financial year, the government is working on both plan and non-plan expenditures that will be required in the next financial year to maintain the tempo, it said.

The plan for the next year will include proposals for recapitalisation of public sector banks, which would involve Rs20,000 crore over the next two years.

Announcing the government package, planning commission deputy chairman Monteksingh Ahluwalia, however, admitted that the year 2009 is going to be difficult.

The government had taken a number of steps since 7 October to minimise the impact of the global financial crisis on the Indian economy. These included:

Additional plan expenditure of up to Rs20,000 crore in the current year, mainly for critical rural, infrastructure and social security schemes such as Pradhan Mantri Gram Sadak Yojana (PMGSY), Jawaharlal Nehru National Urban Renewal Mission (JNNURM), National Rural Employment Guarantee Scheme (NREGS), Indira Awas Yojana, Accelerated Irrigation Benefit Programme and National Social Assistance Programme (NSAP).

An across-the-board cut of 4 per cent in ad-valorem Central value-added tax (CENVAT) rate except for petroleum products.

The Reserve Bank of India and the government had announced several other measures to support exports, housing, micro, small and medium enterprises (MSME) and the textile sectors.

The government had also authorising India Infrastructure Finance Company Limited (IIFCL) to raise Rs10,000 crore to refinance bank lending for infrastructure projects.

Subsequently, other measures have also been taken such as removal of ban on export of cement.