Updated: October 13, 2020 6:59:36 am
Finance Minister Nirmala Sitaraman addresses a press conference in New Delhi on October 12, 2020 (Express photo: Prem Nath Pandey)
Just three days ago, a consumer confidence survey conducted by the Reserve Bank of India said that discretionary spending was expected to remain low in the near future, although people expected an improvement not only in the economic situation but also also in the employment conditions and income scenario. Finance Minister Nirmala Sitharaman’s announcement on measures to boost consumer spending is clearly a recognition that people getting out and spending is key to a faster recovery of the economy.
But then two things stand out in the ad: One, much of it (the consumer spending portion) is the initial burden of spending, or in other words, the reuse of public spending, and the overall package size not much to talk about at home (compared to Prime Minister’s Garib Kalyan Yojana package and AtmaNirbhar Bharat package); And, two, by specifying how and where to spend, the Finance Ministry simply dampened any enthusiasm among the 35-lakhs of central government employees, and almost ensured a suboptimal result in terms of its impact on growth.
The main figures looked good: total demand infusion of Rs 73,000 crore, of which Rs 36,000 crore is additional demand from consumer spending, and the balance Rs 37,000 crore is additional central and state capital expenditure. But in terms of additional fiscal spending, it is only 0.2 percent of GDP.
Also interesting is how the government chose to offer a generosity to its own employees during times of Covid-induced fiscal and economic stress. In announcing the measures, the Finance Minister said: “They (government employees) should be encouraged to contribute to the revival of demand for the benefit of the less fortunate.”
But will the more than 35 lakh government employees spend the money given the many restrictions the ministry has proposed?
By allowing cash payment in lieu of the license travel grant (LTC) right for block 2018-21 (air or train fare plus license fee for 10 days), the Finance Ministry said that employees should buy goods and services worth three times higher than the rate (airfare). or lane according to your slabs) and as much as the license fee. They must do so by March 31 of next year, and they must also spend only on goods that attract a GST of 12 percent or more from a GST-registered supplier via digital mode. They must also present the GST invoice for the goods or services purchased.
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The strategic intention appears to be direct spending on items whose demand had plummeted during the lockdown period. But this can defeat the larger purpose of reviving demand. “The choice or decision of how to spend and where to spend is best left to the consumer… This is not really a cash transfer, it is their right to pay in advance. It is true that the government is being sensitive to the conditions that during the pandemic people cannot travel, but by specifying the conditions, it may end up preventing them from spending, ”said a senior government official, who did not want to be named.
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Capital spending for the Center and the states will certainly help, given the multiplier effect of spending on infrastructure projects and its long-term impact. But this is too small to make a significant difference. The economy contracted 23.9 percent in the April-June quarter of this financial year, and the RBI has estimated that GDP for 2020-21 will contract 9.5 percent. Only a large fiscal intervention by the government in the infrastructure space or direct support for those who lost their jobs during the pandemic can be significant, ”said another policy expert who advises the government.
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