The Centre’s latest stimulus to boost demand is interesting, but the capex boost is underwhelming

| Updated on October 12, 2020 Published on October 12, 2020

For an economy that registered a 20 per cent real fall in Q1 in private consumption, this scheme can make a difference if government employees bite the bait

In an effort to propel the economy into positive territory in quick time, the Centre has come up with an innovative option to spur consumption in the economy without any fiscal impact. The 45 lakh or so Central government employees have been offered an interesting scheme: if they spend, on GST goods, to the extent of thrice of the travel fare to which they are entitled as leave travel assistance plus their leave encashment amount, 45 per cent of that spending will be borne by the Centre. The Centre would have paid those allowances its employees anyway; hence, the net fiscal outgo is negligible. In addition, its festival advance of ₹10,000 is repayable over ten months; for now, they will boost the economy. The Centre appears to be infusing some sort of a ‘Pay Commission effect’ into the economy; it is notable that the Sixth Pay Commission award fortuitously coincided with the 2008 financial crisis, and worked as a significant demand stabiliser. For an economy that registered a 20 per cent real fall in Q1 in private consumption, this scheme can make a difference if government employees bite the bait.

The question, of course, is whether they will. Given that more than 80 per cent of employees are in the Group C category, the average spend to avail of the scheme, assuming a rail fare entitlement of ₹6,000 per person per round trip, would work out to about ₹1.5 lakh for a family of four, of which about ₹70,000 would be reimbursed. Given the tax breaks built into the offer, the scheme is not unattractive but the issue is that people are still worried about their finances in the context of the pandemic and its impact on the economy. So, will they boldly spend such large sums on non-essential items is the question that begs an answer. This amount can be spent on consumer durables, furniture, renovation of homes and two-wheelers, if not low-end cars. All these sectors, particularly those related to residential housing, can generate significant employment, provided they are GST registered entities.

Meanwhile, the festival allowance is likely to spur general spending. The Centre has assumed a promising multiplier by mentioning a demand creation of ₹28,000 crore — which includes ₹9,000 crore that the States will presumably fork out for their employees. As for the States’ coffers, the higher demand is expected to push up GST collections to their benefit as well. The Centre has rightly extended its ‘stimulus’ to the capex side, by pushing an additional expenditure of ₹25,000 crore, in addition to the outlay of over ₹4 lakh crore for this fiscal. However, its ₹12,000 crore interest-free loan to the States is rather modest given their dire financials. Also, given the delayed impact of capex on output, the demand effect is likely to be less than ₹73,000 crore set out by the Centre. Nevertheless, the package is innovative and significant.

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

Published on October 12, 2020
This article is closed for comments.
Please Email the Editor