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Govt steps to boost consumer spending to have ‘minimal fiscal impact’, say economists

The Modi govt Monday announced several steps to boost consumer spending ahead of festive season, estimating that they will result in Rs 1 lakh crore demand boost.

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New Delhi: The Modi government Monday announced a host of measures to boost consumer spending. However, several economists said the fiscal impact of the demand-boosting measures will be minimal, like the government’s previous economic support measures.

The government has chosen to front-load its expenditure and boost cash flows but without any additional pressure on its fiscal deficit, they added. Even so, they said, one will have to wait and watch to see if these measures are able to boost demand.

With a view to boost consumer spending ahead of the festive season, the finance ministry Monday announced a cash voucher scheme where government employees and others can get tax-free cash in lieu of their leave travel concession (LTC) — the government-funded travel scheme — to buy white goods (ACs, washing machines, etc) and other non-food items. 

It also announced a Rs 10,000 one-time special festival advance for government employees. 

The government is hopeful that these measures will boost consumer spending. It also announced measures to increase capital expenditure, including additional Rs 25,000 crore capital expenditure by the government and long-term 50-year interest-free loans for state governments amounting to Rs 12,000 crore. 

These measures put together will boost demand by Rs 1 lakh crore, the government estimates. But economists said it will cost the government around Rs 30,000 crore, and that too from mainly increasing capital expenditure.

These measures are in addition to the Rs 21 lakh crore economic package announced by the government earlier to ease the blow of the Covid-19 pandemic and lockdown on different sections. The fiscal impact of these measures was estimated at less than Rs 2 lakh crore at the time. 

“Circular spending makes the consumer spending push fiscally neutral. As the spending limit on consumer durables can be up to three times the earlier tax concession (tax breaks for travel allowance), we do not believe the scheme will have any material fiscal cost, as the extra GST collected will likely offset the extra cost that may be incurred on the government’s balance sheet,” said Rahul Bajoria, chief India economist at investment bank and financial services company Barclays. 

“Similarly, the Rs 10,000 festival advance is unlikely to be a fiscal cost, but more a cash flow issue,” he said in a note Monday, estimating that the actual fiscal cost of the announcement will be Rs 31,700 crore or 0.16 per cent of the GDP. 

He added that this will not have a material impact on fiscal sustainability. 

Credit rating agency Care Ratings said in a note that there is no fresh outlay from the point of view of the government as employees get to use their entitlements in advance. “This is not like a cash transfer to the employees outside the salary which was being paid,” it added. “The fiscal impact of the additional expenditure by the central government will be around 0.2 per cent of GDP.”

At the press conference where the measures were announced, Finance Minister Nirmala Sitharaman had described them as fiscally prudent. Measures to stimulate demand, she said, must not burden the common citizen with future inflation and not put government debt on an unsustainable path. 

“Today’s solutions should not cause tomorrow’s problems,” she said, in an indication that the government, in all likelihood, will continue to be fiscally conservative.  

Economic Affairs Secretary Tarun Bajaj, also present at the press conference, reiterated that the government will stick to the Rs 12 lakh crore borrowing target for the full year.


Also Read: India may have crossed Covid peak, stage set for economic recovery, says finance ministry


Will it help increase consumption?

Economists are also sceptical about the extent of the demand push that these measures will result in.

“Today’s announcements revealed interestingly designed schemes intended to spur consumer and capital spending, although their fiscal cost and impact on economic activity appears to be fairly modest,” said Aditi Nayar, principal economist at ratings agency ICRA Ltd. 

She added that the LTC and festival advance schemes will result in a temporary boost to consumer sentiment and economic activity, with a sharper pick-up in festive season sales that would subsequently fizzle out.

Care Ratings also pointed out that an increase in consumer expenditure will depend upon how many employees avail of the scheme, given the conditions being imposed.

According to the conditions imposed by the government for the LTC scheme, employees have to spend three times the travel fare to purchase items that have a GST of at least 12 per cent. These purchases have to be made through an online mode. 

“The spending preference due to pandemic situation could limit the overall consumer spending. If the tendency was to save more during the pandemic the thrift motive would continue to dominate in some sections. Also, employees may not use both the options in a single season,” it pointed out.


Also Read: Covid is declining, Modi govt is trying to get it right on the economy. End of the beginning?


 

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1 COMMENT

  1. As long as our PM retains her as FM economy will be guided like this as we are yet to see any really meaningful decision from her as a visionary would have done. She is more of a bureaucratic FM than a Political FM who knows the pulse of the nation

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