Measures to boost consumption: Bid to put money in hand, then tying it too

 The Indian Express,

October 14, 2020

Just three days ago, a consumer confidence survey by the Reserve Bank of India said discretionary spending was expected to remain low in the near future even though people expected an improvement not just in economic situation but also in employment conditions and income scenario. Finance Minister Nirmala Sitharaman’s announcement on measures to boost consumer spending is clearly an acknowledgement that people going out and spending is key to a faster turnaround of the economy.

But then, two things stand out in the announcement: One, much of it (the consumer spending part) is front-loading of expenditure, or in other words, repurposing of government spending, and the size of the overall package is nothing much to talk home about (compared with the Prime Minister’s Garib Kalyan Yojana and the AtmaNirbhar Bharat package); and, two, by specifying how and where to spend, the Finance Ministry just doused any excitement among the 35 lakh-odd Central government employees, and almost ensured an sub-optimum outcome in terms of its impact on growth.

The headline numbers looked good: total Rs 73,000 crore demand infusion, of which Rs 36,000 crore is additional demand from consumer spending, and the balance Rs 37,000 crore is additional Central and state capital expenditure. But in terms of additional fiscal spending, it is just 0.2 per cent of GDP.

It is also interesting how the government chose to package a largesse to its own employees during times of Covid-induced fiscal and economic stress. While announcing the measures, the Finance Minister said, “They (government employees) need to be incentivized to contribute to the revival of demand for the benefit of the less fortunate.”

But will the 35 lakh-odd government employees spend the money given the many restrictions the ministry has proposed?

Allowing payment of cash in lieu of Leave Travel Concession (LTC) entitlement for the 2018-21 block (air or rail fare plus leave encashment for 10 days), the Finance Ministry said employees must buy goods and services worth three times the fare (air or rail depending on their slabs) and as much as the leave encashment. They must do it before March 31 next year, and further they must spend only in goods attracting GST of 12 per cent or more from a GST-registered vendor through digital mode. They will also have to produce the GST invoice for the goods or services purchased.

The strategic intent seems to be direct spending towards items for which demand had slumped during the period of lockdown. But this may defeat the larger purpose of reviving demand. “The choice or decision of how to spend and where to spend is best left in the hands of the consumer… This is not really a cash transfer, it’s their entitlement that is being paid in advance. True, the government is being sensitive to the conditions that during the pandemic, people may not travel, but by specifying conditions, it may end up holding them back from spending,” said a senior government official, who did not wish to be named.

The capital expenditure for the Centre and states will certainly help, given the multiplier effect of spending in infrastructure projects, and its impact over the longer-term. “But this is too small to make any meaningful difference. The economy contracted 23.9 per cent in the April-June quarter this financial year, and the RBI has estimated GDP for 2020-21 will contract 9.5 per cent. Only big fiscal intervention by the government in the infrastructure space or direct support to those who lost jobs during the pandemic can be meaningful,” another policy expert who advises the government said.

Reference: https://indianexpress.com/article/explained/rbi-gdp-money-nirmala-sitharaman-announcement-6722673/