Measures to cost government around 0.2% of GDP, unlikely to do much to stimulate demand
Finance minister Nirmala Sitharaman on Monday sought to create additional demand of Rs 1 lakh crore in the economy in the current financial year, through a clutch of steps that may involve less than Rs 40,000 crore or a tenth of the amount to be saved via expenditure controls already announced, as budgetary cost to the Centre.
A cash booster to central government/CPSE employees via two schemes — with expectations that at least the BJP-ruled states would replicate these — is expected to generate consumer spending of Rs 36,000 crore by March 2021.
The Centre has also enhanced its budget capex for the current fiscal by Rs 25,000 crore to Rs 4.37 lakh crore and offered a total of Rs 12,000 crore to states, under a 50-year interest-free loan facility (as good as grant), producing additional investment demand of Rs 37,000 crore.
If, as the government expects, a section of Corporate India emulates the LTC (leave travel) cash voucher scheme, employees in the organised private sector may spend Rs 28,000 crore by March end, raising the additional demand size to a round, headline-grabbing figure of Rs 1 lakh crore.
However, the government’s expectations of extra demand creation may prove to be over-estimates. While it expects a fourth of the government/PSU staff to make use of the LTC cash/interest-free advance (flat Rs 10,000 per person) schemes, the actual number of users could prove to be much less. The requirement of spending three times the LTC amount by March could be a dampener for many, given that the uncertainty created by the pandemic has buttressed a trend to save, especially among private-sector workers.
Also, the Rs 12,000-crore grant to states may not be fully spent in the current year itself — while Rs 2,000 crore of this is to be released to the states only if they fulfil at least three of the four reforms attached to the extra borrowing window opened under the Aatmanirbhar fiscal package, many states may not have the spending efficiency to receive the second tranche of the Rs 7,500 crore earmarked for non-hilly, non-North-East states. The government has said only 50% of the funds will be disbursed initially and the balance will be subject to full utilisation of the funds released.
Of course, if all things go as the Centre has planned, the additional impact of Monday’s steps on its Budget would be Rs 46,675 crore (Rs 25,000 crore extra capex, Rs 12,000 crore grant to states, Rs 5,675 crore on LTC cash voucher scheme and Rs 4,000 crore on one-time festival advance scheme).
The linkage of LTC cash voucher scheme to purchase of items attracting GST of 12% or more will boost tax collections and help further reduce the net budgetary cost of the stimulus steps.
Sitharaman announced that under the LTC scheme, government employees can choose to receive cash amounting to leave encashment plus three times the ticket fare, to buy goods and services that attract GST of 12% or more, including consumer electronics. This will be in lieu of one LTC entitlement during the 2018-21 period. However, the goods have to be bought by March 31, 2021, and through digital transactions only; GST invoices, too, have to be produced.
Even if one-fourth of the employees avail of the LTC scheme, it will cost the Centre Rs 5,675 crore. However, all of this is actually no extra burden on the exchequer, as it was, in any case, to be borne by the government in the normal course of affairs, though not fully in the current year. Similarly, employees of state-run banks and other public-sector undertakings will also be allowed this facility and the estimated cost for them will be Rs 1,900 crore.
Moreover, the tax concession will be allowed for state government/private sector too, for employees who are currently entitled to the LTC, subject to them following the guidelines of the central government scheme. The exact nature of the relief will be known once the Centre comes out with the detailed guidelines.
Demand infusion in the economy by employees of the central government and PSUs is estimated to be about Rs 19,000 crore. State government employees can catalyse additional demand of Rs 9,000 crore, assuming that a half of the states will adopt the scheme.
Under the special festival advance scheme, central government employees can opt to avail of an interest-free advance of Rs 10,000 each in the form of a RuPay card. They also have to spend the amount by March 31, 2021, and this relief is only a one-time measure. The amount will be recovered from them in a maximum of 10 instalments later.
As much as Rs 4,000 crore is expected to be disbursed under this. If half of the states adopt it, the disbursement would be about Rs 4,000 crore. This also doesn’t involve any permanent increase in government expenditure, as the advance will ultimately be recovered. However, the government has to bear only the bank charges in this regard. The scheme is for all employees, irrespective of their employment status, the finance minister clarified.
As for the LTC, central government employees typically claim it twice in a block of 4 years – one to anywhere in India and one to hometown or two for home town. Air or rail fare, as per pay scale or entitlement, is reimbursed and in addition to this, a leave encashment of 10 days (basic pay + dearness allowance) is paid. Since many employees are not in a position to avail themselves of the LTC due to the pandemic, the scheme offers them a window to enacsh their entitlement.
Fare payment will continue to be tax-free and leave encashment will be taxed at the usual rate, depending on the income-tax bracket of the employee. Given that salaries of government employees are protected even during the pandemic, they are in a better position to spend than the private sector employees, most of whom have witnessed income losses.
Sources said the 50-year loan to states could also be accounted for as budget capex for the Centre as capex spending consists of a loan segment. The enhancement of the capex budget is despite the fact that the Centre’s budgetary capex declined 1.3% on year in April-August, as it applied the brakes on spending since July. The capex growth rate, envisaged for the year, after the latest revision is 30%.
So, an acceleration in spending can now be expected; the Centre will require to accelerate capex over 50% on-year in H2 to achieve the revised investment target for FY21, not an easy task.
The stimuli announced earlier had an estimated budgetary cost of around Rs 3 lakh crore. The spending curbs on departments for the April-December period is estimated to result in savings of nearly Rs 4 lakh crore. Given that even the stimulus cost would actually be lower than estimate and considering the possibility of an extension of spending curbs to Q4, the government still has considerable room for unveiling another round/s of stimulus, without altering the estimated budget size for the year or the enhanced gross borrowing limit of Rs 12 lakh crore.
Just as in the case of the Centre, revenue constraints have led to a slowing of capital expenditure by state governments in the current financial year; in fact, FY20 also saw a deceleration in states’ capital spending growth, bucking a robust trend of the previous few years. Data reviewed by FE for 10 states showed that their combined capex declined 19% on year in April-July of FY21.
The capex grant being provided by the states would have a marginal positive effect on the states’ capex. Delayed/inadequate GST compensation, and the decline their share of divisible-pool taxes due to the overall fall in tax collections buoyancy, coupled with the blow to their own tax receipts have already dented the state’s resources. The enhanced borrowing freedom, including the part meant for GST aid, would likely soften the blow.
The Centre, on its part, is also putting pressure on the central PSEs to accelerate their capital expenditure in the current fiscal, to reduce the extent of slippage of gross fixed capital formation due to lower investments.
With private investments in the doldrums, gross fixed capital formation (GFCF), which was 31.1% of the gross domestic product (GDP) in FY15, declined to 29.8% in FY20.
Private final consumption expenditure, which was the main growth driver in recent years, contracted by as much as 26.7%, year on year, in the June quarter, against a rise of 2.7% in the previous three months and 6.6% in the December quarter of FY20. This was a steeper fall than the overall GDP, which shrank by 23.9% in the first quarter of FY21.