While the two sets of measures to boost consumer spending as well as capital expenditure highlights the government’s acknowledgement that the economy which has been battered by the coronavirus pandemic needs further government support for a sustained recovery
Taking a cue from the Reserve Bank of India which sought to underwrite an economic recovery in its latest monetary policy review, the central government on Monday announced ₹73,000 crore demand push to the economy ahead of the festive season.
While the two sets of measures to boost consumer spending as well as capital expenditure, though modest and designed to stimulate demand in a fiscally prudent manner keeping government’s borrowing programme intact, highlights the government’s acknowledgement that the economy which has been battered by the coronavirus pandemic needs further government support for a sustained recovery.
“Measures by 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 philosophy behind the measures announced on Monday.
The RBI on Friday announced a slew of measures to reduce borrowing cost to revive the economy without cutting the policy rates, also for the first time admitting that the economy will contract 9.5% in FY21 with a mild expansion in economic activity in the March quarter. The economy contracted 23.9% in the June quarter as the government went for the strictest lockdown to contain the spread of the coronavirus pandemic.
The government’s announcements to boost consumer demand such as LTC (leave travel concession) cash voucher scheme ( ₹5675 crore) and special festival advance scheme ( ₹4000 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 LTC in the last four years including FY21 can avail the scheme if they agree to digitally spend three times the air or rail fare and the full amount of total leave encashment before 31 March, 2021 on goods attracting minimum 12% GST. Under the special festival advance scheme, interest-free advance of ₹10,000 to all central government employees will be offered as a one-time facility to be recovered in maximum 10 instalments. The centre is also encouraging state governments and private organisations 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.
DK Srivastava, chief policy advisor 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.
Under government’s bid to boost capex spending which has a higher multiplier effect on growth, Sitharaman announced ₹25000 additional spending by the centre on roads, defence infrastructure, water supply, urban development, defence infrastructure and domestically produced capital equipment. For state governments, Sitharaman announced an interest-free 50 year loan worth ₹12,000 crore for capital expenditure in FY21, including ₹2000 crore for those states which could meet three out of four reforms under the Atmanirbhar package such as one nation, one ration card, power sector, urban local body reforms, among others.