The long-awaited “stimulus,” however, did not contain measures to address the lack of demand in sectors such as hospitality and tourism that have been hit hard by the Coronavirus and that demand remained tepid even after the opening.
Prime Minister Narendra Modi had held consultations with his top economic advisers in July on how to boost spending on central sector projects in a bid to stimulate demand for cement, steel and other inputs, culminating in Monday’s announcements.
The additional capital expenditure and the granting of travel leave and festival loan benefits for central government employees come with the passengers, and the impact will depend on how many employees opt for this scheme.
For example, the allocation of 25,000 crore rupees for additional capital expenditures by the end of March will be made for defense infrastructure, roads, water supply and urban development, provided the equipment is manufactured locally.
There was another support of Rs 12,000 crore to the states, which will be provided in the form of interest-free loans for 50 years. But the clause is that the money must be spent by March and there is an allocation of Rs 2,000 crore for states that meet three of the previously announced reform criteria, such as electricity sector reforms or initiatives related to a ration card of a nation.
Similarly, those who take advantage of the LTC benefit must spend three times their entitlement to buy cars, refrigerators, mixers or vacuum cleaners. The measures marked the government’s new efforts to reactivate sentiment and give some boost to the economy that has been hit by the Covid-19-induced lockdown and growth has plummeted almost 24% in the June quarter and the contraction of the GDP for the entire year is estimated at 9.5% in the current fiscal year.
Along with the conditions, Sitharaman has placed a lot of trust in state governments and the private sector, following the Center’s example and proposing similar schemes.
Using “conservative estimates”, the Center set the cost of the LTC cash voucher scheme at around Rs 5,675 million with another Rs 1,900 coming from banks and state-owned companies. This is estimated to result in a demand of around Rs 19 billion with another Rs 9 billion coming from the states.
Apart from this Rs 28,000 crore, the government expects its Rs 10,000 festival advance to each employee this year to result in loans of Rs 4,000 crore from the Center and another Rs 8,000 crore from the states, which will also boost the demand.
“Although this round of stimulus is fairly limited in scope, another boost to demand cannot be ruled out, perhaps in the fourth quarter of fiscal 21, when the economy has completely come out of lockdowns and has started to gather momentum,” said DK Srivastava. EY India’s senior policy advisor, adding that the scheme “may be riddled with excessive conditionalities.”
Sitharaman, however, emphasized that the end result for the government was not burdening taxpayers or borrowing excessively. While Srivastava estimated the fiscal cost at 0.4% of GDP, others like Barclays put it at 0.16% of GDP.
In any case, the secretary for economic affairs, Tarun Bajaj, said that the annual loans of Rs 12 lakh crore have already been budgeted for this.
Some economists said the measures fell short of expectations.
“Too little, 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 barely move the needle if it does. Some improvement was expected in demand 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 demand sustainability, the economy is unlikely to be better, “said Kunal Kundu , Societe Generale economist for India.
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