Six reasons why the tax package has more to do with putting people’s money in their hands than with starting a paralyzed economy

The central government has announced an economic package that supposedly represents about 10 percent of India’s gross domestic product (GDP). GDP is a measure of the economic size of a country. India’s GDP is around Rs 200 lakh crore. This is how 10 percent of that results in Rs 20 lakh crore, which is the size of the government’s economic package.

Media sections also call it a economic / fiscal stimulus although the government has avoided using this term in its published communications. They have stuck to the term economic package.

But more than anything, the number of rupees lakh rupees of 20 is basically a jumble adding up a different set of numbers, which should not be added in the first place. Let’s try to understand why, in a timely manner.

one • Let’s start in a simple way. Over the next three months, the statutory pension fund contribution made by both the employee and the employer will be reduced to 10 percent of the salary (base salary + allowance expenses) of the mandatory 12 percent. The government expects this measure to add liquidity support of Rs 6.75 crore.

It is important to understand that the government is not spending a single rupee of its own here. A cut in the contribution of the provident fund will increase the monthly salary of the salaried class during the next three months. Of course, with the investment toward tax savings going down (investing in the provident fund counts for that), the income tax payable will go up (for those below the tax range).

But at the end of the day, it’s the people’s money that gets paid instead of being invested in a provident fund. In addition to possibly paying taxes on this additional income, people are also losing interest that they would otherwise have earned over the years.

Yes, this move could help the economy, with more money in their hands, people could spend more. But how can this be counted as part of a government economic package? Even if they spend this money, people spend their own money at the end of the day.

2 • The government has also announced that all outstanding refunds to charitable trusts and non-corporate businesses and professions, including property, partnership, LLP and cooperatives will be issued immediately. Again, this is money that the government owes to different companies and institutions and is being returned to them. How can this be part of an economic package?

3 • Let’s look at another similar move. Tax rates deducted at source / taxes collected at source have been deducted. Basically, these are ways the government collects part of the tax up front and sets up some kind of audit trail. This does not mean that general tax rates have been reduced. Until now, a 10 percent tax deducted at source had to be paid if the interest earned on fixed deposits at a bank crossed Rs 10,000 during the course of any year.

This has been reduced to 7.5 percent. Previously, if the individual earned interest of Rs 1 lakh during the course of any year, the tax deducted at source by the bank would have been Rs 10,000 for that year. It will now be 7,500 rupees.

Having said that, the income tax of the Rs 1 lakh obtained remains the same and must be paid before the due date. This move, of course, helps individuals and businesses with cash flows. This is expected to add Rs 50,000 crore to liquidity according to the government. Again, the government is not allocating any of its money to this. It’s just that part of the tax payment is postponed for a few months.

Of course, that helps by putting more money in the hands of companies and individuals, even briefly. But how can this so-called liquidity support of Rs 50 billion (again people’s money, a large part of which will go to the government eventually) be part of an economic package?

4 • The biggest announcement made as part of this package has been Rs 3 lakh crore unsecured loans for small businesses with a turnover of up to Rs 100 crore and loans of up to Rs 25 crore, to be made by banks and non-banks. bank finance companies (NBFC). The government has provided a 100 percent credit guarantee on these loans (both principal and interest). What that means is that in the event of default, the bank or NBFC facing the default can collect the central government guarantee and collect rather than incur losses.

Again, a good move to get credit in the economy working right now, when banks and NBFCs are reluctant to lend.

But the question is, what does the government spend on this right away? Nothing. You have accumulated what is called a contingent liability and will have to allocate money to it in the coming years. These loans will be valid for four years with a 12-month moratorium on principal repayment. The money that the government allocates for the possibility that these loans are not paid, the banks collect the guarantee and the government has to pay, will be distributed over a period of four years.

Therefore, the government is relying on the banking system to make credit work again. A good move, but the government is not paying anything out of its own pockets right away.

5 • Along similar lines, the government is guaranteeing the loan from NBFC, housing finance companies and microfinance institutions with a low credit rating, up to the point of the first loss of 20 percent.

The government hopes that this measure will lead these financial institutions to borrow up to Rs 45,000 crore if other financial institutions are willing to lend (since the guarantee is only the first 20 percent of the loss). Once again, the government is not spending its own money on this move right away.

6 • Power Finance Corporation (PFC) and REC Ltd will infuse Rs 90 billion rupees into power distribution companies, which are currently struggling. This money will be a loan made against accounts receivable or money owed to power distribution companies. This money will have to be used by the power distribution companies to pay what they owe to the power generating companies. Loans must be guaranteed by the respective state governments.

This is a problem that has been running around for a while. The current economic scenario has only accentuated it. The government trying to solve it is a good thing. However, the central government is not really putting any of its own money into this.

To cut a long story short, what has been announced by the government as a so-called economic package is not really a great package. Basically it is a combination of putting people’s own money in their hands and encouraging the financial system to make more loans. This is not equivalent to a fiscal / economic stimulus as the media calls it. In any economic / fiscal stimulus, the government must be seen putting its money in the hands of the people. Clearly, that is not the case here.

The writer is the author of Easy money trilogy.