The announcement of the stimulus spending came as India's central bank cut key interest rates Saturday by 1 percentage point.
The cut will go into effect Monday and brings the benchmark repurchase rate, at which the central bank makes short-term loans to commercial banks.
The repo rate will move to 6.5% from 7.5%, hitting its lowest level since June 2006 and down from an October high of 9%, according to the Associated Press.
The reverse repurchase rate -- the rate at which it borrows from commercial banks -- was also lowered from 6% to 5% to encourage banks to lend more to consumers.
The Reserve Bank of India also announced measures to ease credit to small businesses, exporters and the real-estate sector.
The AP reported quoted Reserve Bank Gov. D. Subbarao as saying the moves were designed to "arrest the downturn and revive the growth momentum."
A major business group welcomed the actions, according to the AP, but said the central bank could have taken additional steps such as lowering the amount of reserves that banks must keep on hand as a way to free up lending.
The measures are "a good start in the correct direction," the Federation of Indian Chambers of Commerce and Industry said in a statement.
Subbarao said inflation has been declining faster than expected, despite high food costs, due to falling commodities prices and waning domestic demand.
The government's decision late Friday to cut fuel costs should further ease consumer prices, he said. Gasoline prices were lowered by 5 rupees a liter to 45.62 rupees, and diesel prices by 2 rupees a liter to 32.86 rupees.
"Economic activity in India will recover sharply, but a period of painful adjustment is inevitable," Subbarao said.
He added that the economic impact of the Mumbai terror attacks is hard to estimate but he remains hopeful the nation will bounce back quickly.
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