Nirmala Sitharaman Press Conference Highlights: New Measures To Front-Load Consumer Spending, Capex

The government hopes to front-load consumer spending and boost capital spending to support the economy.

12 Oct 2020, 07:31 PM IST

Customers shop for a refrigerator at an eZone retail showroom in the Jayanagae area in Bangalore, India (Photographer Namas Bhojani/Bloomberg)

The Indian government has announced a set of measures in the hope of front-loading consumer spending and capital expenditure. This is the second fiscal support package announced to revive the economy that's expected to see its worst recession in at least four decades.

In a press briefing today, Finance Minister Nirmala Sitharaman announced measures in two buckets — schemes intended to boost spending by central government employees, and those intended to push states’ capital expenditure.

The total estimated boost to the economy may add up to Rs 1 lakh crore if the private sector matches the provisions introduced by the government for its employees, said Sitharaman.

Measures To Boost Consumer Spending

The first is the ‘Leave Travel Concession Cash Voucher Scheme’.

According to details announced by Finance Minister Nirmala Sitharaman, the scheme, applicable to government employees, will operate as follows:

Cash payment to employees in lieu of one LTC during 2018-21
Full payment on leave encashment and payment of fare in three-flat rate slabs will be made.
An employee, opting for this scheme, will be required to buy goods/services worth 3 times the fare and 1 time the leave encashment before March 31, 2021.
Money is to be spent on items where 12% or more GST is imposed.
Spending has to do be done via digital means and only at GST registered businesses.
Spending should happen before March 31, 2021.

Estimated cost of LTC Cash Voucher Scheme for central government employees is Rs 5,675 crore and for public sector banks and units is Rs 1,900 crore, said the government statement.

The same tax concession for LTC tickets is available to state governments and private sector too, the statement said.

The Finance Ministry estimates the scheme could generate additional consumer demand worth Rs 28,000 crore overall.

The second scheme introduced is the Special Festival Advance Scheme

The festival advance scheme, which was a part of earlier pay commissions, was not included in the Seventh Pay Commission.
Scheme being re-introduced as a one-time measure for all central government employees. State governments can consider implementing the same.
Under the scheme, Rs 10,000 advance will be available for all central government employees to be repaid in 10 instalments.
Advance available till March 31 2021; to be given as a pre-paid rupay card.
Cannot be drawn as cash from an ATM but can be spent anywhere.

The one-time disbursement of this Special Festival Advance Scheme is expected to amount to Rs. 4,000 crore; additionally it will generate an consumer demand of an estimated Rs 8,000 crore if given by all state governments, said Sitharaman.

Measures To Boost Capital Expenditure

Along with consumer spending measures, the government has also tried to front load capital expenditure by states.

The first such scheme introduces special assistance to states as follows:

Rs 12,000 crore in special interest free 50-year loans will be provided to states.
Rs 2,500 crore of this will go to North East, Uttarakhand and Himachal Pradesh.
Rs 7,500 crore to go to other states in proportion to Finance Commission devolution formula.
Rs 2,000 crore goes to states which meet some of the criteria set out by the central government earlier.
50% of the amount to be given initially, balance after the first instalment.
Money has to be spent before March 31, 2021; can be used to settle supplier bills
This money will be over and above the borrowing limits set for states.

The government also intends to provide additional allocation for capital spending.

Rs 25,000 crore additional budget will be provided for capital expenditure.
This amount is to be provided for roads, defence infrastructure, water supply, urban development.
Allocations to be made as part of revised estimates of the budget.

Government officials specified that they do not anticipate any additional borrowing on account of these measures.

How Much Will It Help The Economy?

If all measures are fully implemented, the additional spending boost to the economy would be Rs 73,000 crore, said Sitharaman, adding that the total support to the economy could rise to Rs 1 lakh crore if the private sector were to match some of the benefits provided to government employees.

The demand stimulus announced, even if realised fully, is unlikely to bring a major change in the economy by boosting demand, said Devendra Pant, chief economist at India Ratings & Research. “For states, the announcements are unlikely to spur fresh capex but the funds could be used on existing projects and to settle pending bills,” Pant said.

The announcements carry a prudent intent to boost consumption, whilst also being spending-lite so as to not put additional burden on the exchequer, said Radhika Rao, economist at DBS Bank. “In addition to government employees, the boost to demand can be more material if the private sector also takes a cue and mirrors some of the benefits announced by the Finance Ministry,” she said.

Sameer Narang, chief economist at Bank of Baroda said the amount of the stimulus remains low. “The announcements are nevertheless a step in the right direction and will bring some benefits. The announcements for government employees will lead to front-loading of some of the expenditure,” he said.

Watch Finance Minister Nirmala Sitharaman’s press briefing here...