Fiscally restrained govt tries new formula to boost festive consumer spend

Finance Minister Nirmala Sitharaman on Monday announced a two-pronged stimulus package aimed at bolstering capital expenditure and stimulating consumer demand during the upcoming festive season, estimating a Rs 73,000-crore boost by the end of this financial year.

The measures, which signalled the Centre’s fiscally conservative approach towards boosting demand, included giving money into the hands of central government employees, but with strict conditions on spending towards goods and services; a limited hike in its capital expenditure; and paltry interest-free loans to states for funding projects.

“We have kept in mind that the government must not burden the common citizens with future inflation and it should not put government debt on an unsustainable path. Today’s solution should not cause tomorrow’s problems,” Sitharaman said while announcing the measures, which, she added, had the potential of boosting demand above Rs 1 trillion if its impact on the private sector was also accounted for.

The markets, however, weren’t enthused by the move. Analysts said a recovery in demand and consumption-related stocks due to the latest measures would be short-lived, given the government’s fiscal constraints.

Following the announcements, most consumption-driven stocks fell on the bourses. The Nifty Consumption index, a gauge of the performance of consumption-related stocks on the National Stock Exchange (NSE), slipped 0.13 per cent. Losses in some of the individual consumer goods and auto stocks were steeper, with Bajaj Auto, Hero MotoCorp, Voltas, Blue Star, and Crompton Greaves Consumer Electricals, among others, slipping 1-2 per cent. This was despite the Nifty50 closing in the green on Monday.

As part of the stimulus package, central government employees will get cash allowance and an interest-free advance of Rs 10,000 to spend money till March 31, 2021.

The government employees will get cash in lieu of the leave travel concession (LTC), without the need to show proof of travel, provided that they spend a higher amount towards purchasing items that attract goods and services tax (GST) of at least 12 per cent. Such goods include refrigerators, TV, freezer, water coolers, food grinders, mixers, vacuum cleaners, and hair dryers, which households usually purchase during the festive season.

Central government employees are entitled to LTC in a block of four years for their travel across the country. The current LTC claim, for 2018-2021, will lapse by the end of this fiscal year. Government employees weren’t in a position to avail of this benefit and leave encashment due to the Covid-19 pandemic. Now, the government employees will be able to avail of the entitled reimbursement, which would have gone unutilised otherwise, for festive purchases. But they will have to spend three times the travel fare and an amount equivalent to leave encashment through GST-registered vendors by doing digital transactions. If they do so, they will get full leave encashment payment and tax-free travel fare amount they are entitled to.

The move is also aimed at bolstering GST revenues of both the Centre and states -- at a time when their finances have been impacted due to the pandemic.
 

This LTC cash voucher scheme is estimated to cost Rs 5,675 crore for central government employees, and Rs 1,900 crore for employees of public sector units and state-owned banks. Economic Affairs Secretary Tarun Bajaj said the government had made a conservative estimate that only about one-fourth of its employees would avail of the LTC scheme out of the 3.5 million eligible for it.

Additionally, the government has temporarily brought back a festive advance scheme, which was part of the incentives that a limited set of state-owned employees got till 2017. Now, all central government employees can avail of Rs 10,000 as interest-free advance, which will have to be paid back in maximum 10 instalments. But it will be available in the form of a pre-loaded RuPay card, through which cash withdrawals will not be possible. The Centre will take care of the bank charges and expects Rs 4,000 crore to be spent by the government employees towards buying goods and services before the deadline of March 31.

Sitharaman further announced that the government would spend Rs 25,000 crore towards capital expenditure on roads, defence infrastructure (and domestically produced capital equipment), water supply, and urban development by March, 2021. This sum will be in addition to provisions of Rs 4.13 trillion made towards capital expenditure in the Union Budget for 2020-21. The government has spent about 40 per cent of such expenses till the end of September, a senior finance ministry official said.

The government will also give interest-free 50-year loans to the states for capital expenditure of Rs 12,000 crore. However, the government has divided this money into three parts: Rs 2,500 crore for hilly and north-eastern states, Rs 7,500 crore for other states depending upon their Finance Commission devolution, and Rs 2,000 crore to states that meet three out of the four fiscal deficit targets that the government had set while announcing the Atmanirbhar package earlier this year. States can do a bullet repayment after 50 years, hence no servicing of loan is required till then. This money can be utilised for new or ongoing capital projects, as well as settling the debt of contractors or suppliers "on such projects".

The eligibility of most states appears to be “rather modest”, ranging from around Rs 31 crore for Goa to Rs 1,462 crore for Uttar Pradesh, ICRA Principal Economist Aditi Nayar pointed out. “The relatively small magnitude of the long-term loans to be provided by the government to the states is unlikely to provide any meaningful boost to capex in FY2021, in our assessment, although it may allow for an accelerated settlement of pending dues of contractors or suppliers,” Nayar added.

So far as fiscal cost of the measures is concerned, Sitharaman said there was no additional spend under the LTC/festival measures.
 

Besides, Economic Affairs Secretary Tarun Bajaj clarified that this Rs 25,000 crore additional capex by the Centre would not lead to any additional borrowing as the impact of this package had already been factored in. After going for Rs 4.80 trillion additional borrowing for the entire 2020-21, the government is not going for the second round of extra mop-up. It has kept its full-year borrowing limit unchanged at Rs 12 trillion on account of a revenue pick-up, which is expected to compensate for its expenditure, and plans to borrow Rs 4.34 trillion in the second half.

Bajaj also said the Rs 12,000 crore capex to be given to states was a miniscule amount in terms of fiscal cost and would return to the government in 50 years.  
 

According to A K Prabhakar, head of research at IDBI Securities, the measures announced on Monday would give a fillip to consumption, but the demand would get limited to buying only small-ticket essentials. “The government employees form a large part of the entire consumption basket, so the measures will help them and in turn the overall demand. That said they will not rush to buy high-end SUVs etc, but look at essentials such as electronic goods, entry and mid-level cars, etc, instead. There is still a lot of pent-up demand that needs to be released,” he said.

(With inputs from Puneet Wadhwa)