You are here: Home » Economy & Policy » News
Business Standard
Web Exclusive

Capex measures to deliver the goods rather than the consumption booster

States and centre would be spending more on projects like roads, urban development, defence as a result of Finance Minister's announcements.

Topics
India economy | Capex | Govt spending

Madan Sabnavis 

Madan Sabnavis, chief economist, CARE Ratings (Photo: PHOTO CREDIT: Kamlesh Pednekar)
Madan Sabnavis, chief economist, CARE Ratings (Photo: PHOTO CREDIT: Kamlesh Pednekar)

The fiscal announcements made by the Finance Minister (FM) on Monday are a combination of frontloading of consumption expenditure with some affirmative spending by both the central and state governments. The techniques being used for the two objectives are quite different, thus having a diluted impact on the fiscal balances. Overall the impact will be positive, though the extent will be limited.

The more aggressive move is on the where the states and centre would be spending more on projects that have been outlined in specific areas like roads, urban development, defence and water supply. States have been the given option of using these funds to make payments for existing projects, as well as for expediting the same. Hence the Rs 12,000 crore that is allotted to them to be repaid over 50 years without any interest may not necessarily go in for fresh projects – though would add to the investment stream. Also, the per capita state allocation may not be very large to change the investment structure in most states, and such funds may be very useful in completing stalled projects on account of lack of funds. As it is linked to completion before March 2021, a smaller proportion may flow to new projects.

ALSO READ: Govt trains guns on boosting consumer & capital demand with Rs 73K cr push

The centre is to spend Rs 25,000 crore on investment, which would be more direct and help the related industries. If the centre does increase its from Rs 4.12 trillion to Rs 4.37 trillion, there could be positive impact on industries like steel, cement, capital goods etc. The combined impact would be around 0.2 per cent of the gross domestic product (GDP) and to this extent the fiscal deficit would increase.

The consumption push is not really any fresh money in the system, but a case where government or public sector undertaking (PSU) employees are being incentivised to spend their leave travel concession (LTC) on consumer goods with certain conditions. It is an existing benefit which is being channelised to consumption, which again is an option and not mandatory. Employees could prefer to use the facility for travel as and when it would be possible – maybe a year down the line rather than spend the money now.

Also, the Rs 10,000 advance that is being given without any purchase-condition can be taken for regular grocery shopping instead of upsetting savings of employees. Hence, the sum of Rs 8000 crore being spoken of may not go for consumer goods. Further, it is unlikely that employees will cash in their LTC as well as take an advance to buy consumer goods. It could be of the two more likely. Therefore, the overall impact on consumption will be positive at the margin, though muted as the measures are more of a ‘nudge’ through an incentive rather than a cash transfer. For sure, some of the white goods manufacturers and auto dealers could see an increase in demand this festival season.


ALSO READ: FM unveils Rs 73,000 crore demand boost package; Sensex, Nifty pare gains

Can we expect more from the government? It looks unlikely that there will be a fresh set of measures on the fiscal side, as the entire festival season has been covered in this round. The concern is still on the fiscal numbers that do not look good. Given that the GDP growth rate will be negative at between 8-9% this year, tax shortfalls will be the order. The goal should be on ensuring that both the centre and states fulfill their targeted capex this year, which in the past were compromised when the fiscal numbers looked weak.

(Madan Sabnavis is chief economist at CARE Ratings. Views are personal.)

Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Mon, October 12 2020. 14:18 IST
RECOMMENDED FOR YOU
.