The Minister has announced a slew of measures to spur spending and stimulate economic demand.
Finance Minister Nirmala Sitharaman unveiled new proposals to stimulate demand in the economy in the wake of the coronavirus pandemic.
Addressing a press conference, Ms. Sitharaman said that she has broadly classified the proposals into two different compartments — consumer spending and capital expenditure.
She said: “There is no gain saying that the pandemic has affected the economy adversely. The needs of the weaker and poor sections have been addressed somewhat in the various packages announced so far. Supply constraints have somewhat eased but consumer demand still needs to be given a bit of a boost. The proposals presented today are defined in such a way — by frontloading some expenditure or advancing some expenditure with some offsetting charges later. The others are directly linked to an increase in the GDP.”
Consumer spending proposals
The Finance Minister said that the consumer spending proposals include a LTC cash vouchers scheme and a special festival advance scheme. The LTC Cash Vouchers scheme is mainly targetted to employees in the government and other organised sectors.
The Minister described the scheme as follows: “Government and many organised sector employees have their jobs and salaries protected and some initial indications suggest savings have increased as many couldn’t spend their usual expenditure during the lockdown.”
She continued: “Central government employees, in a block of four years — between 2017-18 and 2020-21 — employees would have normally availed of one leave travel concession for any destination of their choice plus one visit to their hometown. If they didn’t choose leave travel to one destination of their choice, they would usually go twice to their native village. This would mean air or rail fare as per their pay scale is reimbursed to them. In addition, they also get ten days of leave encashment, which they pay tax on. The travel fare is tax exempt.”
In the new scheme, all this remains the same, but they can include travel now, said Ms. Sitharaman. “Many of them don’t want to because of COVID-19. Instead, what we are offering is to give the money to them based on three slabs — as per government rules and procedures — they could spend it to buy something of their choice. These are flat rate slabs equivalent to the round ticket fare they would have spent. This must be spent on items that have 12% GST or more; for instance, you cannot use it to buy food that has 5% GST slab. You can only spend them in digital mode only, no cash payments,” explained the FM.
“You will also have to buy only from GST-registered sellers so a GST invoice would be required on the basis of which they will be reimbursed. This spending has to be completed by March 31, 2021,” she said.
This, the Finance Minister said, is a way to incentivise those whose jobs have not been affected due to the pandemic to contribute to revival of demand for the benefit of the less fortunate.
Three times the amount equivalent to the return air/rail fare would have to be spent to qualify for this.
If the Central government employees opt for it, it would cost ₹5,675 crore. Public sector employees can also avail this, which would cost ₹1,900 crore that they would have got as LTC anyway.
The Minister added that the tax concessions are available for the State governments and the private sector companies too. “So if they choose to give such things to their employees, they will also get the same benefit that central employees would get. According to our estimates, the demand infusion into the economy from the Centre and PSUs would be ₹19,000 crore. If 50% of States join in this, this could spur further demand of ₹9,000 crore. These are conservative estimates,” said Ms. Sitharaman.
“States have their own LTC rules and they can come up with variations in the scheme. So additional consumer demand generated, we expect, would be in the range of ₹28,000 crore,” she said.
Special Festival Advance Scheme
The second proposal to spur consumer spending is the Special Festival Advance Scheme, said the Finance Minister.
“Till the Sixth Pay Commission, there was a festival advance scheme in which the highest level of advance was was ₹4,500 per non-gazetted officers. However, there was no such scheme in the Seventh Pay Commission. We are now reviving it as a one-time affair,” said Ms. Sitharaman.
However, this will not be limited to non-gazetted officers, she said. “Under this scheme, ₹10,000 will be available to all central government employees, irrespective of their rank, instead of ₹4,500 that was available in the Sixth Pay Commission. This will be repaid in ten instalments and will be available upto March 31, 2021,” she said.
“A prepaid Rupay card will be given to the availees as an interest-free advance for use in any festival. We are not limiting it for any one festival or GST-only shops. You can spend it anywhere you want. But you cannot withdraw it as cash. The spending will have to be done by March 31, 2021. The bank charges for loading the card will be paid by the central government.,” Ms. Sitharaman said.
She said that the government expects consumer spending to be boosted by ₹8,000 crore from this move, and added that ₹4,000 crore will be disbursed by the Centre under this provision.
Minister of State for Finance Anurag Thakur said that if State governments participate, another ₹8,000 crore could be disbursed. “Our additional consumer demand estimate assumes half of the States opting to do this too. This will also boost tax revenue and will benefit honest traders,” he said.
New thrust for capital expenditure
Speaking on the States’ and the Centre’s proposals on capital expenditure, Ms. Sitharaman said, “Capital expenditure on infrastructure building and anything that goes into asset building, has a greater multiplier effect on the economy. It raises present GDP but also impacts future GDP. We want to now give a new thrust for capital expenditure”.
“50-year interest free loan is being offered to States worth Rs 12,000 crore. This includes ₹2,500 crore for the eight North Eastern States (Rs 200 crore each) and Uttarakhand and Himachal Pradesh will get Rs 450 crore each.
“The second component will relate to all other States – ₹7,500 crore to be divided in proportion to the share of the Finance Commission devolutions. States can spend this on capex, 50% will be given upfront with the rest to be given after the first tranche utilised. But all of this will have to be spent by March 31, 2021.
“The third component of the ₹12,000 crore entails – ₹2,000 crore will be kept for those States that fulfill at least three of the four conditions put in May for giving performance-related borrowing flexibility to States under the Atmanirbhar Bharat package. This can be used for new or ongoing projects and even to pay existing dues. No payment is required from the States till after 50 years,” the Finance Minister said.
On enhanced capital provisions from the Centre, Ms. Sitharaman said ₹25,000 crore has been allotted in addition to the earlier figure set aside for capital expenditure of ₹4,13,000 crore. “This will be for capex, specifically on roads, urban development, water supply, defence infrastructure, and domestically produced capital equipment for defence infrastructure,” she said.
These allocations will be made during the forthcoming revised estimate discussions.
“So, ₹73,000 crore boost is expected to the economy by March 31, 2020, including 36,000 crore of additional consumer demand will be created and ₹37,000 crore of capital expenditure. Another₹28,000 crore boost can be expected if potential private sector spending also happens. We would suggest to the private sector to consider this.
“This is a conservative estimate – the total additional demand could total ₹1 lakh crore, I believe. Measures to stimulate demand must not burden the common citizen through future inflation. We have kept that in mind. We have also kept in mind that this should not result in unsustainable government debt. Today’s solutions should not cause tomorrow’s problems,” Ms. Sitharaman added.