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The economy shrank 23.9% in the June quarter as the Centre imposed a strict lockdown to contain the spread of covid.bloomberg
The economy shrank 23.9% in the June quarter as the Centre imposed a strict lockdown to contain the spread of covid.bloomberg

After RBI cue, government steps up

Centre announces measures worth 73,000 crore to boost consumer spending and capex in a fiscally prudent manner ahead of the festival season

The central government on Monday announced a 73,000 crore demand push to the economy ahead of the festive season, taking a cue from the Reserve Bank of India (RBI), which sought to underwrite an economic recovery in its October monetary policy.

While the measures to boost consumer spending as well as capital expenditure are modest and designed to stimulate demand in a fiscally prudent manner, the announcement highlights the government’s acknowledgement that the virus-battered economy needs further support to foster a durable recovery.

“Measures by the government to stimulate demand must not burden the common citizen with future inflation and must not put government debt on an unsustainable path. Today’s solution should not cause tomorrow’s problem," finance minister Nirmala Sitharaman said, explaining the government’s philosophy behind Monday’s measures.

RBI on Friday announced a slew of steps to reduce borrowing costs to revive the economy without cutting policy rates, and also for the first time admitting that the economy will contract 9.5% in this fiscal year with a mild expansion in economic activity in the March quarter.

The economy contracted 23.9% in the June quarter as the government imposed a strict lockdown to contain the spread of the covid pandemic.

The government’s announcements to boost consumer demand such as leave travel concession (LTC) cash voucher scheme ( 5,675 crore) and special festival advance scheme ( 4,000 crore) are mostly frontloading expenditure with balancing offsetting changes later that will directly benefit over 11 million central government employees.

The central government employees who have not availed of LTC in the past four years, including FY21, can utilize the scheme if they agree to digitally spend three times the airfare or rail fare and the full amount of total leave encashment before 31 March on purchases attracting minimum 12% good and services tax (GST).

Under the special festival advance scheme, an interest-free loan of `10,000 to all central government employees will be offered as a one-time facility to be recovered in a maximum of 10 instalments.

The Centre is also encouraging state governments and private organizations to give similar facilities to their employees.

Sitharaman suggested that the government has targeted this well-off category of central government employees to boost demand as they have escaped the adverse economic effects of the pandemic with their salaries more or less protected and savings increased.

“They need to be incentivized to contribute to the revival of demand for the benefit of the less fortunate," Sitharaman said.

D.K. Srivastava, chief policy adviser at EY India, said these limited direct expenditure commitments may boost private expenditure since the government employees have been incentivized to spend even though the scheme is beset with excessive conditionalities.

“Although this round of stimulus is quite limited in scope, another boost to demand, perhaps in the fourth quarter of FY21, may not be ruled out when the economy has fully exited from the lockdowns and started to gather momentum," he added.

To boost spending on capital expenditure, which has a multiplier effect on growth, Sitharaman announced a `25,000 crore additional spending by the centre on roads, defence infrastructure, water supply, urban development and domestically produced capital equipment.

For states, Sitharaman announced an interest-free 50-year loan worth `12,000 crore for capex in FY21, including `2,000 crore for those states that could meet three out of four reforms under the Atmanirbhar package—one nation-one ration card; power sector, urban local body and ease of doing business reforms.

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