Finance minister Nirmala Sitharaman on Monday announced steps to boost consumer demand and push capital spending by the Centre and states. The FM announced two schemes for government employees including a festival advance plan to shore up consumer demand and a special interest free 50-year loan to states for capital expenditure for Rs. 12,000 crores. She also said that Rs. 25,000 crores additional budget will be provided capital expenditure on roads, defence infrastructure, water supply, urban development, and domestically produced capital equipment.
“We anticipate that the LTC and festival advance schemes will result in a temporary boost to consumer sentiment and economic activity, with a sharper pick up in festive season sales that would subsequently fizzle out,” said Aditi Nayar, principal economist at ratings agency ICRA.
Nayar said the eligibility of most states out of the 50-year interest free loans of Rs. 12,000 crore for capital spending appears to be rather modest, ranging from Rs. 32 crore for Goa to Rs. 1,462 crore for Uttar Pradesh.
“The relatively small magnitude of the long-term loans to be provided by the Centre to the states, is unlikely to provide any meaningful boost to capex in FY2021, in our assessment, although it may allow for an accelerated settlement of pending dues of contractors or suppliers,” said Nayar.
Sitharaman hoped that the measures announced on Monday will trigger additional demand of Rs 1 lakh crore and help revive consumption and growth. The economy has been hit by the Covid-19 induced pandemic and growth has plunged nearly 24% in the June quarter and the Reserve Bank of India estimates the economy to contract by 9.5% in the current fiscal year although a modest rebound is expected in the fourth quarter.
“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.
Some economists said that by announcing LTC, leave encashment and festive advance scheme, the government has frontloaded the income disbursement for employees thus increasing the purchasing power but cautioned that the pandemic could limit them from spending.
“However, increase in consumer expenditure will depend upon how many employees avail the scheme given that the conditions are being imposed. There are around 3.5 million central government employees who would be entitled to this benefit. The spending preference due to the pandemic situation could limit the overall consumer spending,” said Madan Sabnavis, chief economist at Care Ratings.
“If the tendency was to save more during the pandemic the thrift motive would continue to dominate in some sections. Also, employees may not use both the options in a single season. There is no fresh outlay from the point of view of the government as employees get to use their entitlements in advance. This is not like a cash transfer to the employees outside the salary which was being paid. The private sector response will be critical. However, given the stress levels in this segment, it is unlikely that the same scheme will be extended to employees,” said Sabnavis.
He said the capital expenditure move is a positive measure as it will help the state government to finance the ongoing capital projects. The centre’s expenditure of Rs 25,000 cr will be a push to the extent it is spent by March, Sabnavis added.
Watch FM Nirmala Sitharaman announces new LTC cash voucher scheme to boost consumer spending