Finance Minister Nirmala Sitharaman’s announcements of fiscal stimulus at a press conference on Monday turned out to be a bit silly. That’s because the ads are not expected to have a material impact on consumer demand.
The boost to consumer spending is expected to be on the order of Rs36,000 crore. This is split between Rs28000 crore from the License Travel Concession Voucher (LTC) scheme and Rs8000 crore from the special festival advance payment scheme.
The scheme is designed so that the amount lost by the government is expected to be offset by income from taxes on goods and services. “The additional GST collected will likely offset the additional cost that may be incurred on the government’s balance sheet,” say economists at Barclays Securities India Pvt. Ltd. They estimate the actual fiscal cost of the announcement at 0.16% of GDP. Not surprisingly, the markets did not move – the Nifty 50 index rose 0.14% on Monday.
“The announced package is too small to excite the market. The holiday advance scheme and the LTC scheme may stimulate some demand on the margin, “said Sahil Kapoor, chief market strategist at Edelweiss Investment Research.
The measures aim to boost spending on consumer durables and discretionary spending. However, the shares of some consumer durables companies showed a mixed trend in stocks. While Voltas Ltd shares decreased 1.7%, Whirlpool of India Ltd shares increased 1.7%.
To be sure, there will be an incremental boost in demand, but the actual impact on demand relative to the size of the economy is expected to be small. “The increase in consumer spending will depend on how many employees join the scheme since conditions are being imposed,” economists at Care Ratings said in a report on October 12. The rating agency adds: “Spending preferences due to the pandemic situation could limit overall consumer spending. If the trend were to save more during the pandemic, the savings motive would continue to dominate in some sections.”
Government employees can take advantage of the cash license fee if they spend triple the ticket fee on items that attract a GST of more than 12%. Some analysts say there are too many clauses in the new proposal, which may affect its actual effectiveness.
Furthermore, as Anubhuti Sahay, an economist at Standard Chartered Bank puts it, “as the measures are intended to encourage spending by government employees rather than the private / vulnerable section (where job loss / income loss has been significant) , the overall impact will be limited. “
Many analysts also believe that this would be, at best, an advance in government spending. Furthermore, capex measures have also been announced to the tune of Rs 37 billion. This comprises interest-free loans to state governments of Rs12,000 crore and Rs25,000 crore of actual expenditures of the center on infrastructure. Again, the quantum is too small to have a significant impact.
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