Under withering criticism for its handling of the country's economic slowdown and Mumbai's terrorist attacks, the Indian government fought back over the weekend, announcing a coordinated, two-flanked stimulus plan that could top $8 billion. India's moribund stock market momentarily cheered, rising almost 4 per cent by midday (Monday). But it then deflated, closing up just 1.5 per cent, on a day when other Asian markets soared on optimism about economic recovery plans in the US and China.

As the business community's less-than-enthusiastic reaction to the package sank in, New Delhi sought to reassure investors that the government of Prime Minister Manmohan Singh is not finished. More measures are on the way, Kamal Nath, the Minister for Commerce & Industry, told a group of reporters outside his New Delhi office. "There is Step One, then there is Step Two, and then there is Step Three," he said.

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But with India already facing sizable budget deficits, significant inflation, and a continuing liquidity crisis, it is unclear what more the government can do, especially if it wants to hold on to its credit ratings.

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"Frankly, this is the most that India can afford," says Aninda Mitra, a sovereign credits analyst at Moody's in Singapore. He estimates the cost of this package to be 0.8% of India's gross domestic product, which brings the country's budget deficit close to 10 per cent of GDP, if one includes all government borrowings and not just those of the central government. "This is a country with very large government debt," says Mitra. "You can't start to expect China-style packages."

It's a start

Indeed, India's stimulus package, released in two steps over the weekend, pales in comparison with China's recently announced $568 billion infrastructure projects, or the multifaceted public works program that President-elect Barack Obama has promised for the US.

Nonetheless, it is the country's first solid expenditure plan since the start of the global crisis. Until now, New Delhi has largely cut interest rates and tinkered with bank cash reserve ratios and purchase-repurchase rates; those moves increased the amount of cash available in the banking system by about $60 billion.

Meanwhile, the spigots of already-scarce credit continued to tighten, hitting small and midsize enterprises hardest. With no formalized credit scores, and banking relations that depend on proximity and familiarity, many family-owned companies complained that their growth plans were coming undone.

For the first time in seven years, export growth fell 12.1 per cent year-on-year for the second quarter, according to data released by the Central Statistical Organisation in November. The textile industry, which accounts for 17 per cent of India's exports and employs 88 million people, is showing the strain. India's textile producers are likely to generate $20.5 billion in revenue this year, way below New Delhi's target of $30.5 billion.

Within the stimulus package is a nearly $1.5 billion credit window for smaller businesses, to be handled by the Small Industries Development Bank [Get Quote] of India [Get Quote], and a nearly $1 billion refinance option that will be handed out by the National Housing Board. To boost consumer spending in sectors such as autos, cement, and textiles, the government will lower the tax on all products, excluding petroleum, by 4 per cent.

The government also dropped gas and diesel prices, already subsidised by the state, by 6 per cent and 10 per cent on Friday. "The weekend packages, coupled with increased public spending in the runup to the elections, could act as an antidote," especially for small and midsize enterprises, says Rohini Malkani, an economist at Citigroup in Mumbai.

With elections looming, and the Finance Ministry under Prime Minister Singh's direct supervision, it is unclear what the government can do next. Until now, not much has helped ease the impact of the global slowdown, which is likely to shave as much as two percentage points off India's expected 9 per cent growth in GDP for 2008. Consumption in the second quarter of this fiscal year was 5.5 per cent, a four-year low.

Any new announcements will probably be delayed till mid-January, when the Prime Minister convenes a conference on economic affairs in New Delhi. By then, government policymakers will have heard from both industry lobbyists and the stock market, and Singh might be feeling more forceful after a surprisingly strong showing by his Congress Party in local and state elections that ended Monday.

"The fiscal and monetary stimuli are good, but they aren't enough for the economy to revive," says Adi Godrej [Get Quote], chairman of Godrej Group, a Mumbai consumer products company. He expects a "fresh dose" of stimulus by early January. "It's the right time as inflation is low," he adds. Inflation today is at 8.4 per cent, down from 12 per cent in October.