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New Delhi: Finance Minister Nirmala Sitharaman (R) and Finance Secretary Ajay Bhushan Pandey addresses the GST Council meeting, in New Delhi, Monday, Oct. 12, 2020. (PTI Photo)(PTI12-10-2020_000154A) (PTI)
New Delhi: Finance Minister Nirmala Sitharaman (R) and Finance Secretary Ajay Bhushan Pandey addresses the GST Council meeting, in New Delhi, Monday, Oct. 12, 2020. (PTI Photo)(PTI12-10-2020_000154A) (PTI)

Govt’s pre-festival gift may not boost consumption significantly

  • The government’s latest measures are aimed at boosting consumer spending
  • The general spending preferences due to the pandemic could limit overall demand

Finance minister Nirmala Sitharaman’s fiscal stimulus announcements on Monday turned out to be a bit of a damp squib. That’s because the announcements are not expected to have a material impact on consumption demand.

The boost to consumer spending is expected to be to the tune of 36,000 crore. This is split between 28,000 crore from the leave travel concession (LTC) voucher scheme and 8,000 crore from special festival advance scheme.

The scheme is devised in a way that the amount foregone by the government is expected to be offset by goods and services tax receipts. “The extra GST collected will likely offset the extra cost that may be incurred on the government’s balance sheet," say economists at Barclays Securities India Pvt. Ltd. They estimate the actual fiscal cost of the announcement at 0.16% of GDP. It’s little wonder the markets were unmoved. The Nifty 50 index rose 0.14% on Monday.

Too little to impact
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Too little to impact

“The package is too small to excite the market. The festive advance sch-eme and LTC scheme can stimulate some demand at the margin," said Sahil Kapoor, chief market strategist at Edelweiss Investment Research.

The measures are aimed at boosting spending on consumer durables as well as discretionary spending. Shares of some consumer durable firms though showed a mixed trend on the bourses. While the Voltas Ltd stock fell by 1.7%, shares of Whirlpool of India Ltd increased by 1.7%.

To be sure, there will be an incremental boost to demand, but the actual impact on demand relative to the size of the economy is expected to be small. “Increase in consumer expenditure will depend upon how many employees avail the scheme given that conditions are being imposed," said economists from Care Ratings in a report. “Spending preferences due to the pandemic could limit overall consumer spending. If the tendency was to save more during the pandemic, the thrift motive would continue to dominate in some sections."

Government staff can avail leave encashment cash on a tax-free basis if they spend thrice the ticket fare on items that attract GST of 12% or more. Some analysts say there are too many clauses in the proposal, which may affect its actual effectiveness.

Also, as Anubhuti Sahay, economist at Standard Chartered Bank, says, “As the measures are aimed at encouraging spending for government employees rather than private/ vulnerable section (where job losses/ income losses have been significant), the overall impact will be limited."

Many analysts also reckon this would be at best an advancement of spending by the government. Further, capital expenditure measures to the tune of 37,000 crore have also been announced. This comprises of interest-free loans to state governments worth 12,000 crore, and 25,000 crore of actual expenditure by the Centre on infrastructure.

Again, the quantum is too small to make a meaningful impact.

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