India’s economy contracted at a record 23.9% in the June quarter of FY21. It was indicative of the massive economic damage it suffered due to covid19 pandemic. The economic outlook is projected to continue as weak for India by many economists and other financial experts. But at the same time in the recent months the Indian economy has seen deceleration in the rate of contraction in the economic activities. For instance, the industrial production fell at a slower pace than in the month of August than in July.
The services sector PMI has also reported to have jumped sharply in September. Moreover, September’s manufacturing PMI hit the highest mark since January 2012, while exports increased in the same month for the first time since February of this year, hinting at improvement in external sector conditions. Yet, since the pandemic times are hardly over and, there is no vaccine developed so far, there is lack of certainty about the future outlook of the world economy. The IMF’s World Outlook report projects a long and difficult ascent in the forthcoming periods for most economies. In such circumstance, a fiscal support may be needed to give boost to the economic activities at least in the sectors which may be operated in a covid19 compliant way.
Reaching out to consumers through a stimulus in kind
Recently the finance minister of India has announced another round of stimulus to give a boost to the aggregate demand levels in the almost halted economy. The Government and employees in organised sector in India are entitled to a Leave Travel Allowance (LTA). This LTA exemption can be claimed by an employee wherever provided, for travel undertaken by them or their families within India.
Central government employees get LTC in a block of four years (one to anywhere in India and one hometown or two for home town) in the form of air or rail fare, as per pay scale or entitlement. The same is reimbursed and a leave-encashment of 10 days is paid. However, the employee is not entitled to this benefit in every year. LTA exemption is available for 2 journeys in a block of 4 years. The block applicable for the current period is calendar years 2018-21.
Due to Covid-19, employees are not in a position to avail of LTC in the current block of 2018-21, so under LTC Cash Voucher Scheme, government employees can opt to receive cash amounting to leave encashment in lieu of LTC during 2018-21 along with full payment of leave encashment and fare as per three slabs depending on entitlement.
They can use the money to buy items on which GST is applicable at the rate of 12 per cent or more. This is going to give boost to the consumer demand as the LTC cash vouchers can be availed only through digital mode and at places registered under GST before 31 March 2021. This may have some distinct advantages, some of them are discussed below:
- As the amount sanctioned by the government can be spent only on the goods and services, the level of aggregate demand will increase,
- Some portion of the consumer expenditure shall come back to the government in the form of GST collection.
- This amount can be spent in till March, 2021 only. Hence this is going to help the government ease out the fiscal deficit which is already set at a higher level in the current fiscal.
The salaried government employees whose salaries are protected, may have increased their ratio of savings to disposable income and such a stimulus may incentivise them to go on a shopping spree thereby giving a boost to the level of economic activity and this may create/restore jobs for the people in factories and service sector.
This stimulus is different from the economic stimulus as given by the government in consonance with the RBI in the month of May, 2020. It is more like an expenditure incentive rather than a fiscal incentive. According to the finance minister, the cash voucher scheme alone will generate demand estimated at Rs 28,000 crore.
Thus, we may call this stimulus as an expenditure booster much more than an income booster. It is more directly linked to raising consumer demand than a general economic stimulus. It is more likely to act faster than an economic stimulus as the latter may give out results in medium to long run.
Extending fiscal support to the states
The government also announced that the north-east states will get 50-year interest-free loans of Rs 1,600 crore and Himachal Pradesh and Uttarakhand will get Rs 900 crore. This amount also needs to be spent by March 31, 2021. Other states too are getting Rs 7,500 crore loans in proportion to their share in Finance Commission evolution.
Another stipulation is that half of the amount shall be disbursed initially and the second part will be disbursed once the previous amount is utilised. This is another example of how the government is focusing on increase in expenditure in a time bound way which itself is an incentive to avail future instalments of the economic stimulus granted to select states.
Targeted booster for revival of the core sector
Further, the government increased the centre’s capital expenditure budget by Rs 25,000 crore from Rs 4.13 lakh crore for expenditure on the road, water supply, urban development, and defence infrastructure including manufacturing domestic equipment. This will pump in money into the economy through the pockets of the labourers working on these projects on one hand and the demand for construction material, electrical goods and capital goods shall increase on the other hand.
Indian economy needs a quick fix
It is a very apt strategy to boost the level of aggregate demand in a quick manner through selective methods and a nice strategy to gain without pain, i.e., avoiding undue stress on the already strained government resources. The exigencies arising out of the covid19 pandemic has raised the debt to GDP ratio to around 70 percent of the GDP.
The government has tried to push up the level of aggregate demand through various stimulus without much of extra burden on the exchequer. The timing of the stimulus is quite apt and there may be some revival of economic activity that we may expect in the remaining part of the current fiscal. Particularly as the festive season is ahead and the consumer sentiment seems to be improving overall.