SBI Ecowrap - Conditional fiscal stimulus at a minimal 0.2% of GDP

The festival advance scheme is akin to the interest free advance provided to certain public sector bank employees, in which they receive one month’s salary which is repaid in 12 interest free installments.

Oct 13, 2020 10:10 IST India Infoline News Service

After a long clamor for fiscal stimulus the Government today came up with measures with direct fiscal support to people and states and to generate demand. However, the announcements have come with a "conditions apply" tag. These measures include: (i) LTC Cash Voucher Scheme for Government employees if they can’t travel due to pandemic. Employees can use the money to buy items attracting 12% or more GST, increasing consumer demand. However, employees can spend an LTC cash voucher only through digital mode and at places registered under GST before 31 March 2021. (ii) Special Festival Advance Scheme of Rs 10,000 to Government employees for festivals upto 31.3.2021, which would be returned on maximum of 10-installments, (iii) Thrust to Capital expenditure of states and centre, including Special interest free 50-year loans to States for capital expenditure for Rs 12,000 crores & Rs 25,000 crores additional capex from Rs 4.13 lakh crore for expenditure .
 
In the case of LTC scheme, it is doubtful how many will avail this scheme as if the person availing this also has to pay GST amount out of his/her pocket then it will be a burden on the person and in fact he would be better off paying taxes on the amount availed by him. The scheme is unlikely to work unless the Government decides to pay GST component also over and above the fare entitlement amount as is done by many PSBs. Further since LTC covers not just the employee but the dependent family members, the draw down on the personal income will be huge. For instance for employee eligible for business travel get two way fair value of Rs 36000. For a family of four this works out to Rs 1,44,000. The total expenditure works out to Rs 4,32,000 plus GST amount of Rs 1,03,680.
 
The festival advance scheme is akin to the interest free advance provided to certain public sector bank employees, in which they receive one month’s salary which is repaid in 12 interest free installments. Out of the two schemes, it is only in case of the festival advance proposal that one can think there is some additional income over and above the current income. This is where one can expect demand will get a boost by way of discretionary consumption.
 
However, the consumption boosting proposal ignores the vital fact that rise in savings is due to curtailment of discretionary consumption in higher fractile groups. The fractile group that is targeted under proposal have higher marginal propensity to save and any additional savings is more likely to be not consumed.
 
Government has also proposed a special interest free 50-year loans to States for capital expenditure for Rs 12,000 crore to be spent till Mar’21. Of the total, Rs 10,000 crore will be provided to all states (in proportion to share in Finance Commission devolution) and Rs 2,000 crore to states which meet at least 3 out of 4 reforms given in AtmaNirbhar fiscal deficit package. Though we welcome this step, we believe that Rs 12,000 crore is minimal given the fact that this amount is only 1.6% of states FY21 budget estimate of capital expenditure of select 18 states. This number will reduce further if we add the capex projections of all the other states. Regarding the extra Rs 2000 crore, we believe that only a few states will be eligible for this amount (out of 19 states that we analyse only 8 states are eligible).
 
We believe only around 10-15% employees would use the LTC Scheme. In case of festival advance assuming it is taken in November and since it is returned in maximum of 10 instatements, 4 instalments will be paid back in this fiscal, thus leaving a burden of Rs 2400 crore to the exchequer. Further capital expenditure will lead to Rs 25,000 crore cash outgo for Centre’s budget allocation and Rs 12,000 crore loan for States. Taking all these into account, Rs 40,000 crore is the maximum additional cash outgo of the Centre during the current fiscal, which is around 0.21% of GDP. The last stimulus package had a cash outgo of Rs 2 lakh core or around 1% of GDP. Let us hope these new measures are not a case of too little too late. However, on a positive note, power demand across major states continue to increase, implying economic recovery. Economic activity as revealed by our business activity index also shows improving momentum since August. The moot question is sustainability.

The author of this article is Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India

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