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Photo: Ramesh Pathania/ Mint
Photo: Ramesh Pathania/ Mint

Stimulus 2.0: A lesson in fiscal conservatism

The finance minister’s pre-festive package to stimulate demand was notable more for its complexity than generosity. An overriding concern, it seems, was to avert a fiscal blowout

On Monday, finance minister Nirmala Sitharaman made a pithy statement after she unveiled the Centre’s Stimulus 2.0 package, as it was widely billed. “Measures by the government to stimulate demand must not burden the common citizen with future inflation," she said, “and must not put government debt on an unsustainable path." This captured the spirit of what turned out to be a modest exercise in spurring private expenditure. It also served as an explanation of the government’s reluctance to open its coffers. Had she stated so at the start, expectations of a big bonanza to outdo May’s atmanirbhar outlays would have got suitably tempered. The latest measures seem like a response to criticism back then that little had been done to directly boost demand. This, the Centre had held, was best done once India had largely been unlocked and people were ready to shop. In all, the government expects Monday’s moves to generate about 1 trillion in extra spending by consumers at large. This could well happen, and anything that encourages people to loosen their purse-strings is welcome. But, given the plan’s details, it is likely to work chiefly on those who were already disposed to making big-ticket purchases this festive season.

The finance minister duly highlighted the multiplier effect on jobs and incomes of state spending, especially for infrastructure and other projects. The grand sums announced, however, had fiscal conservatism written all over them. The Centre plans additional capital expenditure of 25,000 crore, just 6% more than earmarked earlier, while our states would be given 50-year loans free of interest worth 12,000 crore for such undertakings (some of it conditional on reforms done). These numbers hardly seem sufficient to multiply money at a scale needed to haul overall demand out of its slump. As for spurring private consumption, the tools deployed stand out more for their complexity than generosity. The government has converted an existing tax deduction on travel allowances and fares paid for vacations into a spending incentive valid till the end of 2020-21. Under one part of this offer, subject to each taxpayer’s travel-fare limit, a third of one’s shopping expenses could qualify for tax relief—so long as digital payments are made, the items bought attract a minimum 12% goods and services tax, and these GST invoices are submitted as proof. Far less complex is the Centre’s festive-season advance for central government employees, who would be given Rupay cards preloaded with 10,000 each as a zero-interest loan. Private sector employers have been urged to follow suit. Whether they do so may depend on their judgement of how worthwhile such an effort would be in rewarding their staff.

Perhaps the real point to note is the nearly negligible fiscal impact of Sitharaman’s goody bag. Her latest stimulus package, as she made clear, will not alter the Centre’s current borrowing target of 12 trillion for this fiscal year, already up from 7.8 trillion planned back in February. This would relieve some of the inflation worries that have arisen on the back of a fiscal deficit seen by analysts at 7-8% of this year’s shrunken output. Bond investors would be particularly pleased. Meanwhile, commercial activity is starting to see a revival of sorts and new rays of optimism have begun to lift the country’s economic gloom. Even if Monday’s stimulus ends up only as a footnote in the story, what matters is India’s recovery.

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