Shares rallied by nearly five per cent on the back of the stimulus package unveiled at the weekend, a week after the end of the militant siege of financial hub Mumbai that compounded worries about the economy. But dealers called the rally a “knee-jerk” reaction, and analysts and business leaders said the fiscal and monetary package was insufficient to lift an economy that has slowed significantly.

K.V. Kamath, head of the Confederation of Indian Industry business lobby, said more steps were needed “to keep India a vibrant economy.” The government announced last week extra spending of 200 billion rupees ($4 billion) as part of a total three-trillion-rupee outlay planned for the remainder of the financial year ending March 31, citing a “global economic outlook that has deteriorated sharply.”

The outlay includes higher spending to improve India’s dilapidated ports, roads and other infrastructure and a four per cent cut in consumption taxes on cars, textiles and other goods. The announcement came a day after the central bank cut two leading rates by 100 basis points each to spur lending in a system that had been virtually paralysed by the international credit crunch.

The package is going in “the right direction but [is] not enough,” said Siddhartha Sanyal, an analyst at Mumbai’s Edelweiss Securities. Rates are still high by Western standards with the bank’s benchmark repurchase rate at which it lends to commercial banks 6.50 per cent, a legacy of aggressive monetary tightening to curb inflation, now on the wane. “It is hard to be that optimistic about India’s economic prospects” even in the second half of the next year, said HSBC economist Robert Prior-Wandesforde.

For the outlook to substantially improve “we need to see banks immediately passing on more of the policy rate reductions and a bigger fiscal easing.” And beside the $586 billion stimulus package announced by neighbouring China last month, India’s scheme “looks piffling,” said another economist. Limiting India’s firepower for big-spending measures are its combined federal and state deficits, likely to top 7 per cent of gross domestic product this year, among the highest in the world, analysts say.

The government’s “small fiscal boost” appears to have been “affected by the inflexibility of government finances,” said Rajeev Malik, economist at Macquarie Securities. Indian financial authorities, who acted after a slew of gloomy data including a fall in exports and a slide in vehicle sales, said they were ready to take further steps to keep the economy on a strong growth path.

The stimulus package was overseen by Prime Minister Manmohan Singh, who took over the portfolio after he made the finance minister, Palaniappan Chidambaram, home minister following the Mumbai attacks that killed 172 people.

Source: AFP