Big push

New Delhi, Oct. 26: The government is likely to step up spending on its flagship programmes and infrastructure projects, while it persuades the Reserve Bank of India to pump more money into the system — a twin-pronged strategy to head off the slowdown in the economy.

Finance ministry officials said the RBI might announce fresh measures next month to boost liquidity within the system, which will spur demand and nudge companies to make investments.

The government traditionally steps up spending from October and has several projects lined up for this month-end. The RBI has also shovelled over Rs 180,000 crore into the system through cuts in the cash reserve ratio (CRR), or the amount of money that banks must keep with the central bank.

While this should help ease the liquidity crunch, industry chambers fear that older borrowers may default unless there are deep cuts in interest rates. However, the government expects a cut in fuel prices to create an environment where rates can be reduced.

A cut in petrol and diesel prices, which looks likely now because of the fall in global crude prices and political compulsions ahead of the elections in key states, would put a lid on inflation and allow interest rates to be reduced further.

A final decision on reducing fuel prices would depend on global prices and the rate at which the rupee was traded against the dollar. Global crude prices have fallen from over $100 per barrel to under $70 in recent weeks, but these gains have been offset by the sharp depreciation of the rupee.

Last Monday, The RBI cut the repo rate by one percentage point to 8 per cent, but industry and analysts felt it was not enough to check the slowdown in industrial growth.

Industry grew just 1.3 per cent in August this year and 4.9 per cent in the first five months of this financial year compared with 10 per cent over the same period last year.

Officials said since the RBI had already cut CRR to 6.5 per cent from a high of 9 per cent and would consider the option of a further cut. Global credit flows to emerging economies have started drying up. The RBI again may cut CRR in January. It might, however, reduce the statutory liquidity ratio (SLR) by 1 per cent.

Banks are required to park 25 per cent of their deposits in government securities under SLR rules. In September, the new RBI governor, Duvvuri Subbarao, effectively cut SLR by one percentage point when he permitted banks to dip into this reserve to meet their cash shortage.