Stimulus | Right intent, but design and conservatism may not yield desired results

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There has been a crying need for another round of stimulus and the government has come out with additional measures to spur consumption as well as investment demand.

To be fair, the intent is positive and made it clear that the government acknowledges the need to push demand, to act once again, and must get full marks for it and also for some innovative thinking. The government has rightly focussed on the near term i.e. remainder of FY21 growth to complement some of its earlier reform measures that clearly focused only on the medium term. The timing is right, and the attempt is to boost consumption just ahead of the festive season.

However, apart from intent, innovative thinking and timing there are two other equally important factors that will determine the outcome of these measures: the design of the schemes and its implementation.

Let us look at the design of the consumption scheme. The government announced a cash voucher scheme for its employees for leave travel concession given that COVID-19 has made travel hazardous. Hence, why not allow employees to use this money to spend on goods and services of their choice, with certain conditionalities?

The expected size of this intervention is estimated to be about Rs 19,000 crore. Moreover, if state governments’ employees get to avail of this scheme then it would add another Rs 9,000 crore to consumption spend. The government also innovatively plucked out the scrapped festival advance scheme as a one-off measure to give an advance of Rs 10,000 to employees repayable in 10 instalments. This step is likely to lead to a frontloading of spending by government employees. The additional spending estimated on account of this measure is about Rs 80 billion. Interestingly, employees would be issued pre-loaded Rupay cards of the advance amount so that this amount is not saved.

Now let us look at the mechanics of the Leave Travel Allowance (LTA) scheme. Government employees don’t receive LTA unless they provide travel invoices, unlike employees in the private sector. So for a government employee the choice is between providing invoices of spending that are three-times the amount of their claims or not receive anything.

The choice for private sector employees is quite daunting. Consider a private sector employee in the 20 percent tax bracket with an LTA allowance of say Rs 20,000. In case they do not claim tax benefits on LTA, they will receive Rs 16,000 (Rs 4,000 deducted by the way of a 20 percent tax on Rs 20,000) at the end of the fiscal. Now, if they choose to go in for the new scheme, they need to spend Rs 60,000 to get tax benefits of Rs 4,000! Thus, the choice is between receiving Rs 16,000 without tax benefits or spending Rs 60,000 to incur tax savings of Rs 4,000. The opportunity cost is just too large, and it is questionable if individuals will undertake such a large spending in returns for small tax savings.

The government has also permitted tax-exempted payments on leave encashments if employees provide invoices equivalent to the amount receivable by the way of such encashments. For an employee in the 20 percent tax bracket with encashable leaves of say Rs 20,000, an equivalent spending will need to be incurred to save Rs 4,000. The opportunity cost is much better here compared to the LTA scheme and can spur some additional spending.

A simple consumption voucher scheme, as proposed here, would have fared much better than such a complex arrangement. The government could issue consumption vouchers of a fixed amount to every household. These vouchers could be used across any shop or retail outlet or even online over a specified period of time (say three months) and provide the holder a 25 percent discount on purchases. The shopkeepers/businesses could deposit these vouchers with banks and collect cash in their accounts in exchange.

The key advantage of these vouchers would be that unlike cash transfers, these would not be amenable to savings and would necessarily need to be spent. Besides, the actual fiscal cost to the government would be smaller than the total amount of vouchers, as it would recover a part of the cost in the form of GST on the additional spending.

Among other measures, the government increased its capital expenditure budget by Rs 25,000 crore, to be spent on areas such as roads, water supply, and defence infrastructure. It also extended 50-year interest-free loans of Rs 12,000 crore to states in the current fiscal year over and above the other borrowing limits of state governments. This number pales in significance when seen in the context of the Rs 4.1 trillion budgeted spending number.  Importantly capital expenditure spending has lagged — so far spending has been -1 percent YoY as compared to the budgeted 22 percent.

Thus, the schemes do show that the government has its heart in the right place but by being conservative in its spending approach, it is evident that the fiscal measures announced thus far can’t compensate for the loss of private sector demand.

(With inputs from Rahul Agrawal, Economist, M&M)

 Sachchidanand Shukla is chief economist, M&M Group. Views are personal.