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Wednesday, October 21, 2020

Government to spend Rs 37,000 crore, give sops to spur festive demand

NEW DELHI: Finance minister Nirmala Sitharaman on Monday announced additional allocation of Rs 37,000 crore towards capital expenditure, and put money into the pockets of government employees ahead of the festival season, hoping to trigger demand of Rs 1 lakh crore in her latest bid to revive economic activity.
The much-awaited “stimulus”, however, did not contain measures to address the lack of demand in sectors such as hospitality and tourism that have been hit hard by Coronavirus with demand remaining tepid even after opening.
PM Narendra Modi had held consultations with his top economic advisors as far back as July on boosting spending on core sector projects in a bid to spur demand for cement, steel and other inputs, which culminated in Monday’s announcements.
The additional capex and leave travel concession and festival loan benefits for central government employees come with riders, and the impact will depend on how many employees opt for this scheme.

For instance, the Rs 25,000 crore allocation for additional capex by March-end will be made for defence infrastructure, roads, water supply and urban development, provided the equipment is manufactured locally.
There was another Rs 12,000 crore support to the states, which is to be provided in the form of interest-free loans for 50 years. But the rider is that the money has to be spent by March and there is a Rs 2,000 crore allocation for states which meet three of the reform criteria announced earlier such as power sector reforms or one-nation one ration card related initiatives.
Similarly, those availing of the LTC benefit need to spend three times their entitlement in purchasing cars, fridge, mixers or vacuum cleaners. The measures marked the government’s fresh efforts to revive sentiment and give some push to the economy which has been battered by the Covid-19 induced lockdown and growth has plunged nearly 24% in the June quarter and full year GDP contraction is estimated at 9.5% in the current fiscal year.
Along with the conditions, Sitharaman has placed a lot of reliance on state governments and the private sector taking a cue from the Centre to and come up with similar schemes.
Using “conservative estimates”, the Centre pegged the cost of the LTC cash voucher scheme at around Rs 5,675 crore with another Rs 1,900 crore coming from state-run banks and companies. This is estimated to result in demand of around Rs 19,000 crore with another Rs 9,000 crore coming from the states.
Apart from this Rs 28,000 crore, the government expects that its Rs 10,000 festival advance to each employee this year will result in loans of Rs 4,000 crore by the Centre and another Rs 8,000 crore by the states, which will also boost demand.
“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,” said DK Srivastava, chief policy advisor at EY India, adding that the scheme “may be beset by excessive conditionalities”.
Sitharaman, however, emphasised that the bottom line for the government was not to burden taxpayers or excessively borrow. While Srivastava estimated the fiscal cost at 0.4% of GDP, other such as Barclays put it at 0.16% of GDP.
In any case, economic affairs secretary Tarun Bajaj said the annual borrowings of Rs 12 lakh crore has already budgeted for this.
Some economists said the measures fell way short of expectations.
“Too little and too late. When the economy desperately needs a stimulus of an additional 2% of GDP, the announcement of fiscal stimulus of less than 0.1% would barely move the needle if at all. Some improvement in demand was expected this quarter due to a combination of pent up demand and festival driven demand. But if fiscal intervention only leads to a little bump without being able to ensure demand sustainability, the economy is quite unlikely to be better off,” said Kunal Kundu, India economist at Societe Generale.
Watch FM announces Rs 10,000 interest-free festival advance to employees



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