Ready for the festive season?

Let's talk about the stimulus package announced yesterday..

Oct 13, 2020

The most awaited festive season is back! A few days onto Dussehra, Milad un Nabi, Diwali, Christmas and a host of festivals lined up next to that. Sure, we’ll miss the flame, flare and glamour of the season owing to social distancing norms, but we’re Indians, that gusto is in our blood! So yeah, time to go on a spending spree, isn’t it? The annual home-renovation, a new car, gadgets from Flipkart’s Big Billion and Amazon’s Great Indian Sale, gold for Dhanteras and what not? A lot of bang for the bucks, eh?

Well, that could be too optimistic a scenario! With income levels deteriorating, lack-lustered consumer demand of goods and services, and prices rocketing, there’s a big concern as consumption comprises about 60% of India’s GDP! Ergo, to bring the economy back on track, a consumption boost is the only way out. But how? Mind you.. with tax collections low, in five months, India’s already breached 109% of annual fiscal deficit targets (excess of expenditure over taxes) plus a record borrowing target of Rs. 12 Lakh Crore! Thus, we don’t have much of room to spend either! So, here’s the catch — spend without actually spending too much.

Just yesterday, the FM Nirmala Sitharaman, came up with her ‘goody bag’ to announce the pre-festive stimulus package, proposed to boost the demand by Rs. 73,000 Crores. In her words — “Measures by the government to stimulate demand must not burden the common citizen with future inflation, and must not put government debt on an unsustainable path.” In short, make it without opening up the coffers.

Let’s see what the Government has to offer this time…

Special Festival Advances

Festival advance was given to employees till 6th Pay Commission recommendations were in implementation. Now, basically, it’s a one-time affair. So, this is for all Central Government Employees. If you’re one, you’re eligible for an interest free loan of Rs. 10,000 in the form of a pre-loaded Rupay card. But unlike your Debit card, you can’t withdraw money using this card from ATMs, neither you can park it in your savings account, no. This is solely for you to spend and you can spend it anywhere. And, don’t you think this is for a lifetime. You have up to March 31, 2021 to spend this money after which you’ve to repay it to the Government in 10 instalments. No free lunches!

Private sector employers have also been urged to follow suit. But, that’s their discretion to opt in or not, based on how worthwhile it could be in rewarding their staff.

Additional consumer demand generation is estimated at Rs. 8,000 Crores.

Leave Travel Concession (LTC) Cash Voucher

Well, this is like — Old wine in a new bottle! The government has converted an existing tax deduction on travel allowances and fares paid for vacations into a spending incentive. Every 4 years, central government employees get LTC to travel to any destination of their choice, plus one for their hometown. But obviously, now travelling isn’t something you’d prefer. So, isn’t it fair to get the opportunity to encash those allowances? Yes, it is. And so, the government has decided to give its employees the fare they’re entitled to as cash vouchers. But this ain’t free money either. You’ve got to spend it (thrice the amount entitled) on non-food purchases that attract a GST of 12% or more. Besides, the payment has to be made digitally and GST invoices are to be submitted as proof.

Demand infusion to the economy by Central Government and PSU employees is estimated to be Rs. 19000 Crores, with a further Rs. 9000 Crores by State Government employees if even half the states adopt the scheme.

However, as the current LTC period is until Dec. 2021, employees may wait beyond March to actually avail LTC by travelling. Moreover, none will be ready to cough-up extra money as GST along with the expenditures! As the SBI Economic Research explains — “[..]if a person is eligible for Rs 50,000 as fare, then he would have to spend Rs 1,50,000 on goods or services and pay a GST of minimum of Rs 18,000 as 12 per cent GST. Overall, he would have to shell out Rs 1,18,000 from his pocket to get Rs 50,000.” Will you spend 2.36X in return of 1X as benefits? Of course not, that absolutely doesn’t make any sense. And this friction, in addition to the complex tax mechanism, might fail to actually make people spend now! There will be some respite only if the Govt. proposes to bear the GST on these expenditures, over and above the cash voucher.

Capital Expenditures and assistance for States

The Central Government has planned Rs. 25,000 Crores of additional Capital Expenditure (just 6% more than earmarked earlier!) This shall be spent on roads, defense infrastructure, water supply and urban development.

Moreover, the Government is ready to extend Rs. 12,000 Crores worth of interest-free loans to states for a period of 50 years. (Rs. 2500 Cr. for North East, Uttarakhand & Himachal Pradesh; Rs. 2000 Cr. for eligible states under Atma Nirbhar Bharat plan; Rs. 7500 Cr. for all other states.) All these loans will have to be spent on new or ongoing capital projects, before March 31, 2021. 50% of the proposed money shall be provided initially and the balance after first installments are repaid.

While this is laudable, these seem to be a pittance, insufficient to multiply money in a large scale. As for the states, it may not spur the capital expenditures, but could help them push some existing projects to the pipeline and settle pending bills.

Guys, have a look at the rising stock markets, over-enthusiasm for IPOs and swelling bank deposits, and you notice that India is flush with funds. Thus, the primary task of the Government was to nudge people who can afford, to go out and spend. And will they succeed in their attempt?

Well, to this, the rivals and critics are really skeptical. They say that a meagre 1.3% extra has been allotted to states and no additional money provided to people! You see, even allotting a little extra to people doesn’t necessarily mean they’re gonna spend it. There is something called ‘the velocity of money’ (rate at which people spend cash). So, if the advances offered doesn’t make people to spend, there is no point in all of this! Although you can’t blame people to be cautious and prudent, saving more (and not spending) isn’t gonna help the economy anyway!

Whatever it is, ultimately the goal is India’s recovery. With some ‘revival of sorts’, let’s hope this festive season provides the much needed boost to India’s consumer demand.

So, hey guys, hope y’all loved reading today’s piece.

If you know someone who’d like to make sense of the pre-festive stimulus package, do share this article with them.

I’d also love to hear your opinion on the proposal.

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