The government said on Sunday it planned $4 billion of extra spending this fiscal year in an effort to revive fading economic growth hit by the global slowdown and to shore up confidence knocked by militants' attacks on Mumbai.
Authorities are pulling out all the stops to keep India's once-impressive pace of growth from braking too sharply while big economies face recession, with the Reserve Bank of India (RBI) slashing key interest rates on Saturday to keep credit flowing.
In a well-flagged move, the government said it was scrapping import duty on naphtha for the power sector and export duty on iron ore fines, letting a state-run infrastructure firm issue tax-free bonds worth Rs 10,000 crore and cutting a central valued-added tax rate by four percentage points.
"The government is keeping a close watch on the evolving economic situation and will not hesitate to take any additional steps that may be needed to counter recessionary trends and maintain the pace of economic activity," a statement said.
Total spending in the final four months of the fiscal year ending in March would be around 3 trillion rupees, it said, adding that more fiscal stimulus was likely to be needed in the year starting next April.
It planned to allocate more funds for incentives on exports and provide an extra Rs 1,400 crore for modernising the textile industry, which has been hit by the global slowdown.
India had hoped to avoid the worst of the global financial crisis, with demand largely domestically driven and growth an impressive 9 percent in the fiscal year ended last March.
But high local borrowing costs in the early half of the year, deteriorating demand abroad and sudden paralysis of its lending markets in October as the credit crunch spread, have taken their toll on India's factories, builders and consumers.
Economists now expect expansion of about 7 percent this fiscal year, with a risk it could fall below 6 percent in 2009/10.
Following central banks in Asia and Europe last week, the RBI sliced one percentage point off its two key short-term rates on Saturday, taking its main lending rate to 6.5 percent, its lowest in two and half years.