The government has initiated another package to revive demand and boost investor sentiment in India. An additional $14 billion over the next six months should help India's Covid-hit economy get back on track.
In a major step to boost demand, Indian Finance Minister Nirmala Sitharaman announced a consumption- and investment-based stimulus package that could increase consumption and capital investments by an additional $14 billion over the next six months and help India's Covid-hit economy get back on track.
Announcing what was effectively a Stimulus Package 2.0, following the one she unveiled in May, Indian Finance Minister Nirmala Sitharaman announced a raft of measures to put additional money into the hands of select groups of consumers to push demand and also gave a strong push to additional capital expenditure by the federal and state governments.
Under Indian laws, taxpayers can avail of Leave Travel Concession (LTC), which is a tax-free allowance that employees can claim twice in a given block of four years to cover expenses on holiday travel.
Since many employees may not be in a position to travel anywhere because of Covid in the 2018-2021 block of four years, the Modi government has decided to provide full payment on leave encashment and payment for fares for air or rail travel as per the entitlements of individual employees.
Under the scheme, to avail of the tax-free allowance, employees will have to buy goods and services worth at least three times the LTC amount before the end of the current financial year, i.e., before March 31, 2021. Then, the money has to be spent on goods and services that attract Goods and Service Tax (GST) of at least 12 per cent.
Under Indian law, goods like cars, cell phones, washing machines, refrigerators, shavers, televisions, vacuum cleaners, water coolers, food grinders sewing machines, etc., are levied GST at the rate of 12 per cent above, making them eligible for purchases under this scheme, which will also extend to services such as interior design.
All of these products have huge backward linkages with other feeder industries that together employ millions of people. Analysts have estimated that if only a fourth of all federal employees opt for this scheme, additional sales of about $4 billion will be generated. This amount will double if private sector employees join in what could be a great Indian shopping festival - aimed at lifting both the mood of consumers, improving the bottom lines of the beneficiary sectors and augment revenue collections by the government.
Besides this, Sitharaman also unveiled another scheme to improve consumer sentiment. She announced a one-time festival advance of $1,300 per employee for everyone working for the federal government regardless of level or rank.
This advance, which will have to paid back in 10 instalments, is expected to put a little more than $550 million in the hands of consumers. That amount could double if 50 per cent of all state government employees come on board the scheme.
Then, to boost capital expenditure across the country, the Modi government has announced a $1.65-billion special interest free 50-year loan scheme for the states. The funds will be distributed in accordance with the accepted formula for such disbursals.
The only condition: The loan will have to be spent entirely on new or ongoing capital projects and can also be used to settle bills of contractors and suppliers. And the full amount will have to be spent before March 31, 2021, thus giving a boosting capital expenditure and investment in the current financial year.
Further, India's federal government in New Delhi will spend an additional $3.3 billion on capital expenditure, over and above the $56-billion investment already planned.
Many economists have been calling for a hefty stimulus package to lift the Indian economy after the country's gross domestic product (GDP) shrank 23.9 per cent in the first quarter of 2020-21 because of the Covid-19 pandemic.
Three major economic indicators - consumer spending, investments and exports - showed major contraction and this, many economists and agencies - including the Reserve Bank of India, the World Bank and others - are predicting, has set the stage for a full-year contraction of 9-10 per cent - the first such contraction in four decades.
Sitharaman's measures could lift gross fixed capital formation, which is a proxy for private investment in the economy, which shrank 47 per cent. It is also expected to prove a big fillip to private final consumption, which indicates consumption demand in the economy. This important indicator clocked a -26.7 per cent contraction even as the manufacturing sector recorded a decline of 39.3 per cent and the services sector shrank 26.8 per cent.
These measures will largely be revenue neutral. Care Ratings, a leading credit rating agency said of the consumer-focused measures: “This is not like a cash transfer to the employees outside the salary which was being paid... The fiscal impact of the additional expenditure by the central government will be around 0.2 per cent of GDP.”
Calling the measures fiscally prudent, the Finance Minister said: “Today's solutions should not cause tomorrow's problems.” Economic Affairs Secretary Tarun Bajaj added that the government will stick to its $160-billion borrowing target for the current fiscal.
Sitharaman's observation and Bajaj's statement are a strong indication that the Modi government will probably remain fiscally conservative.