Boosting Demand

Why in news?

The Centre has come up with an innovative option to spur consumption in the economy without any fiscal impact.

What are the moves made?

• Allowances - The 45 lakh or so Central government employees have been offered an interesting scheme.
• If they spend, on GST goods, up to thrice of their leave travel assistance and their leave encashment amount, 45% of that spending will be borne by the Centre.
• The Centre would have paid those allowances to its employees anyway; hence, the net fiscal outgo is negligible.
• Festival advance - The Centre’s festival advance of ₹10,000 is repayable over ten months; for now, they will boost the economy.
• These moves are made to propel the economy into positive territory in quick time.

What is the Centre trying to do?

• The Centre appears to be infusing some sort of a ‘Pay Commission effect’ into the economy.
• It is notable that the Sixth Pay Commission award coincided with the 2008 financial crisis, and worked as a significant demand stabiliser.

What is the problem?

• For an economy that registered a 20% real fall in Q1 in private consumption, this scheme can make a difference if government employees bite the bait.

• The question, of course, is whether they will.
• Given the tax breaks built into the offer, the scheme is not unattractive.
• But the issue is that people are still worried about their finances in the context of the pandemic and its impact on the economy.
• So, will they boldly spend such large sums on non-essential items is the question that needs an answer.
• This amount can be spent on consumer durables, furniture, renovation of homes and two-wheelers, if not low-end cars.
• All these sectors can generate significant employment, provided they are GST registered entities.

Will the festival allowance have an impact?

• The festival allowance is likely to spur general spending.
• The Centre has assumed a promising multiplier by mentioning a demand creation of ₹28,000 crore.
• This includes ₹9,000 crore that the States will most probably fork out for their employees.
• As for the States’ coffers, the higher demand is expected to push up GST collections to their benefit as well.

Why this move is welcomed?

• The Centre has rightly extended its ‘stimulus’ to the capital expenditure (capex) side.
• It has pushed an additional expenditure of ₹25,000 crore, in addition to the outlay of over ₹4 lakh crore for this fiscal.
• However, its ₹12,000 crore interest-free loan to the States is rather modest given their dire financials.
• Also, given the delayed impact of capex on output, the demand effect would be less than ₹73,000 crore set out by the Centre.
• Nevertheless, the package is innovative and significant.

Source: Business Line