As it unveiled a second stimulus package moments after the RBI slashed its main policy rates for a slowing economy, the government said it was preparing to recapitalise state-run banks to the tune of 200 billion rupees ($4.1 billion).

This would take place over the next two years to ensure the banking system does not suffer from capital adequacy constraints.

It allowed the creation of a special financing entity to provide liquidity support against investment grade paper to non-banking finance companies.

The statement said the liquidity potentially available though this window would be 250 billion rupees.

India's economy, Asia's third-biggest, has shown consistent signs of slowing amid the worldwide downturn and high borrowing costs at home, after growing at 9 percent or above for the past three years.

Economists and government advisers and officials expect expansion to moderate to around 7 percent this fiscal year and the central bank's chief said last month that 2009/10 looked like being an even more challenging year.

In early December, Indian authorities cut policy rates, announced $4 billion in extra spending and rolled out a four-percentage point cut in factory gate duties in an attempt to boost flagging activity.

Adding to concerns over stumbling economic growth, data on Thursday showed India's exports contracting 9.9 percent in November from a year earlier, the second consecutive fall after a 12.1 percent dip in October.

Stimulus Package 2 – Highlights

The Government is committed to taking steps for minimizing the impact of the global financial crisis on the Indian economy. To this end, Government has taken a number of steps since October 7, the most recent being the measures announced on 7.12.2008. These included:

(i) Additional plan expenditure upto Rs. 20,000 cr. 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).

(ii) An across-the-board cut of 4% in ad-valorem Cenvat rate except for petroleum products.

(iii) Several other measures to support exports, housing, Micro, Small & Medium Enterprises (MSME) and textile sectors.

(iv) Authorising India Infrastructure Finance Company Limited (IIFCL) to raise Rs. 10,000 cr. to refinance bank lending for infrastructure projects.

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

2. Additional steps are being taken on the monetary, credit and fiscal front to further strengthen the contra-cyclical stance of policy. The Reserve Bank has on Friday announced a set of measures. In addition, with a view to further liberalizing the policy on External Commercial Borrowing (ECB), the Government and the RBI have decided:

(a) The 'all-in-cost' ceilings on such borrowing would be removed, under the approval route of RBI;

(b) 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;

(c) NBFCs, dealing exclusively with infrastructure financing, would be permitted to access ECB from multilateral or bilateral financial institutions, under the approval route of RBI.

(d) 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 US $ 6 bn to US $ 15 bn.

The decisions at points (a) to (c) would be reviewed after June 30, 2009.

3. The flow of credit to the economy will be further enhanced by the following:

(i) An 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 Rs.25,000 crores.

(ii) 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.

(iii) 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.

(iv) 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 Department of Financial Services will jointly set up a Cell to monitor progress on this front. Matters of MSMEs remaining unresolved with the Banks- SME Helpline for more than a fortnight may be brought to the notice of this Cell.

(v) Recently the guarantee cover under Credit Guarantee Scheme for micro and small enterprises on loans was extended from Rs.50 lakh to Rs.1 crore with a guarantee cover of 50%. In order to enhance flow of credit to micro enterprises, it has been further decided to increase the guarantee cover extended by Credit Guarantee Fund Trust to 85% for credit facility upto Rs.5 lakh. This will benefit about 84 per cent of the total number of accounts accorded guarantee cover.

4. Governments are facing constraints in financing expenditure because of slower revenue growth. To help maintain the momentum of expenditure at the state government level, states will be allowed to raise in the current financial year additional market borrowings of 0.5% of their Gross State Domestic Product (GSDP), amounting to about Rs 30,000 crore, for capital expenditures.

5. India Infrastructure Finance Company (IIFCL), which has already been authorized to raise Rs.10,000 cr. through tax free bonds by 31.03.2009 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 Rs.25,000 crore. To fund additional projects of about Rs.75,000 crore at competitive rates over the next 18 months, IIFCL is being enabled to access in tranches an additional Rs.30,000 crores by way of tax free bonds once funds raised in the current year are effectively utilized.

6. Exporters are especially hit by recessionary conditions globally. To support exports a number of steps have been taken. As a further measure:

(i) Taking into account the fact that the rupee has appreciated nearly four per cent against the dollar since November 2008, 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 31.12.2009.

(ii) Duty drawback benefits on certain items including knitted fabrics, bicycles, agricultural hand tools and specified categories of yarn are being enhanced. These changes will take effect retrospectively from September 1, 2008.

(iii) Exporters have raised a number of procedural issues where modification of procedures could reduce delays faced by exporters. To consider these and similar problems, Government has decided to constitute a Committee under the chairmanship of the Finance Secretary including Secretaries of the Departments of Revenue and Commerce to look into and resolve these issues on a fast-track basis.

(iv) EXIM Bank has obtained from RBI a line of credit of Rs.5000 crore and will provide pre-shipment and post-shipment credit, in rupees or dollars, to Indian exporters at competitive rates.

7. Other measures designed to counter recessionary trends are the following:

(i) Exemptions from CVD on TMT bars and structurals, and from CVD and Special CVD on cement, which were given to contain inflation, are being withdrawn. Full exemption from basic customs duty on zinc and ferro alloys, which was also provided to contain inflation, is being similarly withdrawn.

(ii) GOI will work with State Govts. to encourage them to release land for low income and middle income housing schemes.

(iii) States, as a one time measure upto 30.06.2009, will be provided assistance under the JNNURM for the purchase of buses for their urban transport systems. A scheme towards this end will be announced shortly.

(iv) Accelerated depreciation of 50% will be provided for commercial vehicles to be purchased on or after 1.1.2009 upto 31.03.09.

8. Government is closely monitoring its spending to expedite the pace of expenditure for all schemes and programmes. 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.