Economic Highlight

New Delhi,19 October 2020

New Stimulus Package

STINGY, NEED MORE CASH  

By Shivaji Sarkar

The unveiling of yet another stimulus package through increasing the purchasing power of the Central government employees is a welcome move for cash strapped, slowing economy, and heading for high inflation amid contraction of industrial production.

It is a limited package of Rs 73,000 crore – Rs 28000 crore LTC and leave encashment, partly taxable, for purchasing consumer goods; Rs 8,000 crore on age-old festival advances (loan); Rs 12,000 crore capital investment by States via 50-year interest-free loans and Rs 25,000 crore additional capital spending on infrastructure – roads, defence, water supply and urban development.

The government is trying to nudge the private sector to offer similar LTC benefits, a provision that does not exist in most company rules. It estimates if it happens an additional Rs 28,000 crore boost to the economy would be available. It may, however, not succeed to the extent despite offering of tax benefit to private companies.

According to Finance Minister Nirmala Sitharaman the LTC move would create demand worth Rs 19,000, not very large but is likely to help large GST-paying farms. The spending has been clubbed to an amount three times the value of LTC benefits on purchase of items having at least 12 per cent GST from GST-registered vendors. In short, it will not benefit if one purchases farm goods or any other services that is not subject to 12 per cent GST. An employee will have to spend Rs 2.94 lakh if he receives Rs 1.34 lakh of LTC benefits, as per the official circular.

The circular says the benefit is being given because travel is difficult during COVID-19 as there is disruption of transport and hospitality sector. It is a candid admission of the dislocation of services.

The largesse is aimed at boosting industrial production as the index of industrial production shrinks 25 per cent in the first five months and continues to shrink June to August at 8 to 15.7 per cent against a 2.4 per cent growth in the same period in 2019. There could be a small ripple effect as the government employees alone have some surplus for spending but expecting a mere Rs 28,000 crore to do miracle is a bit too much. The employees would have to pay income tax on their leave encashment component of Rs 15,000 and GST of Rs 36,000 – government gets back a minimum of Rs 51,000 per purchase.

Still it would add to the festival happiness to a large section of the employees, though SBI Research estimates that it would be availed by about 10 per cent of the employees because of the rules and the condition of shelling out double the amount from their savings. The researchers wonder how many employees could shell out Rs 1.6 lakh from their own kitty to receive Rs 1.34 lakh.

The rules rigmarole and a provision that only 50 per cent of the LTC would be given as advance and rest on production of purchase invoices would lead to several intra-departmental harassment of employees, as is normal for claiming even official travel expenses may act as dampener. In reality, unless the full cash component is given and the government stops witch hunting, a good move may get entangled in apprehensions and remain unutilized.

The festival interest-free Rs 8,000 crore loan for non-gazetted employees is an annual feature. It boosts market sales. This is almost universally utilised. The LTC component too can be allowed without attaching so many strings to it for the pious aim of boosting the sales. Let the government trust its employees and serve the goal of boosting economy.

The government’s gesture admits that the nation needs huge cash infusion. But it evaporated with demonetisation. Expecting the private sector to get into such rigmarole at a time when the firms themselves are in crunch may not fructify.

The other Rs 37,000 crore infrastructure components to be spent by State governments are long-term expenses and would have small, if not little, impact in immediate terms. Instead extending it as loan for their GST dues could have served better and created a festival bonhomie.

The stingy moves may dazzle publicity but it is getting lost in bureaucratic mesh. The officials have put more spanners into it than the political element of the government can understand. It is not easy for a government to shell out Rs 73,000 crore, wishing it away as mere publicity gimmick is a bit too much. But the gestures should come with a bigger heart and without the strings for really boosting a sagging economy.

The government must free these of mesh of rules and redo the task for the larger benefit of the nation, whether for individual employees or the States. The intention that people and States take the money and spend, needs to be encouraged and put on a platter, and not be stymied with socialistic cloaks of unnecessary rules.

The gesture is worth a million words as the economy is contracting severely – 9.5 per cent as per RBI and 10.3 per cent as the IMF says. Purchasing power is reducing as inflation is shooting up. In September, inflation shot up to 7.34 per cent, an eight-month high. However, according to CMS Information Methods, the rural sector that shows signs of 12 per cent more, better than pre-pandemic level in e-commerce, FMCG, consumer durables and insurance spending in September, have not got any benefit of the package.

The rural sector is in crunch too. The free food grain dole and less procurement have suppressed wholesale prices of wheat and other grains. Many farmers are struggling to get even Rs 1450 a quintal though the MSP is Rs 1950. The free dole has impacted demand and due to lockdown official procurement has slowed down. Thus, the farmer is losing but packaged large grain sellers are profiteering by spiking prices for urban consumers - a peep into the future post-new farm bills!

Mere stimuli for the sake of it are not enough. It must be backed by rules simplification and sticking to the concept of giving dole as doles. The socialistic way of giving with one hand and taking it back with two, would not achieve the aims of the government.  If it is for cash infusion, it must do it with vigour. This nation runs on cash and let its economy thrive on it. Freer are shackles better would be the growth. ---INFA

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