Without a big enough stimulus, large number of units will shut down; any recovery estimate has to factor this in
The government’s attempts to boost consumption spending need to be on a much larger scale and a lot more innovative. Consumer confidence, today, is running at all-time lows as RBI’s survey shows and with good reason; while there is no doubt the economy is slowly recovering, we have no way of knowing whether this momentum will sustain or peter out after the festive season. In any case, simply getting back to pre-Covid levels isn’t enough because the GDP grew at a pitiable 3.2% in Q4FY20 and 4.2% in 2019-20.
The fact is, several sectors have been badly hit, and thousands of jobs have been lost. Under these circumstances, expecting even government employees—whose lifestyles have not changed one bit because of the pandemic and whose jobs are secure—to loosen their purse strings to spend a little extra is asking for too much. FM Nirmala Sitharaman’s incentives—a tax break on the fare component of the LTC if three times the amount is spent and a pre-loaded Rupay card for Rs 10,000 as an advance—are somewhat underwhelming.
The objective clearly is to get households to spend such that the government is compensated for the loss of income tax revenues with a gain in GST revenues—since the goods bought need to attract a GST of 12% or more and be paid for digitally. Consumers, however, are unlikely to be excited by the prospect, especially since many of them may not be earning salaries that put them in the higher tax brackets. The Rs 10,000 interest-free advance might tempt some, though paying via a RuPay card means they cannot avoid GST. The estimate that these schemes could result in consumption spends of Rs 36,000 crore—if the states join in—appears somewhat optimistic.
There is only one way to boost consumption, and that is by making large investments that create jobs. Since much of the private sector has neither the capital nor the ability to borrow, it is the government that needs to step in. The intention to give states a 50-year loan for Rs 12,000 crore—by raising the 2020-21 capex of Rs 4.13 lakh crore is laudable.
States can either set up new projects or spend on ongoing ones, or they can use the funds to pay off their bills to suppliers and vendors. The amount, however, is relatively modest and can’t really make a difference to growth. The additional Rs 25,000 crore capex for 2020-21 is disappointing. The Rs 4 lakh crore of capex needs to be at least Rs 8 lakh crore, and while one appreciates the entire amount can’t possibly be spent before March 2021, the projects must be shortlisted, contracts awarded and recruitment must begin.
Unless the government announces its intention to spend a large amount to stimulate the economy, there is no way households will muster the courage to spend meaningful sums. This paper has pointed out that banks are sitting on large surpluses as they are lending little of the deposits they are getting. This money could be better utilised were the government to mop it up from households directly via retail tax-free bonds and use it for capex. What is important is that the government prioritises growth. Given the critical state of the economy, which is expected to contract 10% this year, it should not fret too much about the fiscal deficit and inflation, but instead, be concerned about jobs.
Capacity utilisation collapsed to 47.3% in Q1FY21 from 69.9% in Q4FY20, and while it would have recovered in the September quarter as business activity resumed, it is likely to have been well below desired levels. It is important production is ramped up quickly, and it is very disappointing to see very small piece-meal initiatives being rolled out rather than some big bang stimulus.