Stimulus 2.0: Govt measures too little too late; may not move the needle

The progressive opening up of the economy is improving economic activity and some of the high-frequency indicators have raised hopes of revival. The data released on Monday showed industrial production contracted by 8 per cent in August, which was better than the 10.4 per cent in July and the 15.7 per cent in June. There is a near consensus now that the government should support demand at this stage to make the recovery more durable. In that context, the government’s announcements on Monday to revive consumer demand and investment activity are too little, too late to make any meaningful impact.

To increase consumer spending, the government announced a scheme of cash vouchers for leave travel concession, for central government employees. Since it is not advisable to travel in the current environment, employees can use this money to spend on other things, subject to certain conditions. This is certainly an innovative idea because it seeks to nudge white-collar employees to spend, but it is not at all clear if government employees would be willing to avail themselves of this scheme in large numbers. The expected demand infusion through spending by the Central government and central public-sector employees is estimated to be about Rs 19,000 crore. If state governments, too, extend the scheme to their employees, it would add consumer demand worth another Rs 9,000 crore. Further, the Central government will extend an interest-free advance of Rs 10,000 to its employees. Government employees are perhaps the only lot whose income has not been affected by the pandemic. Thus, an advance of Rs 10,000 is unlikely to result in higher consumption.

In terms of capital expenditure, the Union government will extend 50-year interest-free loans of Rs 12,000 crore to states in the current fiscal year. The amount will be over and above the other borrowing limits of state governments. Again, this is a positive move but may not have a significant impact. The money is likely to be used in existing projects and clearing pending dues. The Centre has also increased its capital expenditure budget by Rs 25,000 crore, which will be spent on areas such as roads, water supply, and defence infrastructure. However, it remains to be seen if the government is able to spend its capital expenditure budget. Normally, in a fiscally challenging year, capital expenditure tends to suffer. 

At a broader level, it is clear that the government is not willing to stretch its finances further as Union Finance Minister Nirmala Sitharaman categorically said that today’s solutions should not become tomorrow’s problem. Also, expenditure to stimulate demand should neither be inflationary nor put government debt on an unsustainable path. It is hard to dispute the government’s reasoning. However, it is amply clear that the pandemic-induced economic dislocation will not end this year. Thus, it is important to have a revised medium-term fiscal road map. This will help gauge the kind of fiscal space that can be created without taking unnecessary risks. It will enable the government to make more effective intervention and maximise output. Minor tinkering and a reluctant increase in expenditure are unlikely to generate demand at a meaningful scale and in turn help growth in the current circumstances.