Finance Minister Nirmala Sitharaman announced on Monday measures to boost consumer demand and boost capital spending by the Center and the states. The FM announced two schemes for government employees, including a festival advance plan to shore up consumer demand and a special 50-year interest-free loan to states for capital expenditures of Rs. 12 billion rupees. She also said that Rs. An additional Rs 25 billion budget will be provided for capital expenditures on roads, defense infrastructure, water supply, urban development and domestically produced capital equipment.
“We anticipate that the festival and LTC advance plans will result in a temporary boost to consumer confidence and economic activity, with a sharper rebound in holiday sales that would subsequently disappear,” said Aditi Nayar, chief economist. from the rating agency ICRA.
Nayar said that most states’ eligibility for the 50-year interest-free loans of Rs. 12 billion rupees for capital expenditures seems to be quite modest, ranging from Rs. 32 crore for Goa at Rs. 1462 crore for Uttar Pradesh.
“The relatively small magnitude of long-term loans the Center makes to states is unlikely to provide a significant boost to capital spending in fiscal 2021, in our assessment, although it may allow for accelerated settlement of outstanding installments. from contractors or suppliers, ”said Nayar.
Sitharaman expected that the measures announced on Monday would trigger an additional demand of Rs 1 lakh crore and help jump-start consumption and growth. The economy has been affected by the Covid-19-induced pandemic and growth has plummeted nearly 24% in the June quarter and the Reserve Bank of India estimates the economy will contract 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 a fiscal stimulus of less than 0.1% would hardly move the needle, if at all. Some improvement in demand was expected this quarter due to a combination of stifled demand and festival-driven demand. But if fiscal intervention only leads to a small increase without being able to guarantee the sustainability of demand, the economy is unlikely to be better, “said Kunal Kundu, India economist at Societe Generale.
Some economists said that by announcing LTC, a plan to charge leave and holiday advance, the government advanced the disbursement of income for employees thus increasing purchasing power, but they warned that the pandemic could limit their spending.
“However, the increase in consumer spending will depend on how many employees take the plan, given that the conditions are being imposed. There are around 3.5 million central government employees who would be entitled to this benefit. Spending preference due to the pandemic situation could limit overall consumer spending, ”said Madan Sabnavis, chief economist at Care Ratings.
“If the trend were to save more during the pandemic, the saving motive would continue to dominate in some sections. Also, employees cannot use both options in a single season. There are no new disbursements from the government’s point of view, as employees can use their rights in advance. This is not like a cash transfer to employees outside of the salary that was being paid. The response of the private sector will be essential. However, given the stress levels in this segment, the same scheme is unlikely to extend to employees, ”Sabnavis said.
He said the capital spending movement is a positive move as it will help the state government finance ongoing capital projects. The center’s Rs 25,000 spending will be a boost as long as it is spent in March, Sabnavis added.
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