The Indian government recently unveiled two key measures to spur consumption and capital expenditure (Capex). The initiatives are projected to result in swift spending of over Rs. 1 lakh crore by March 2021. The schemes introduced are the Leave Travel Concession (LTC) voucher scheme and a festival advance scheme. Additional steps have been taken to enhance Capex by the Centre and the states.
These steps intend to stimulate consumer spending and encourage Capex. While supply constraints have eased in recent times, consumer demand remains affected.
Details of the Atmanirbhar Bharat Package and its aim
The previously announced Atmanirbhar Bharat package aimed to cater to the needs of the society’s vulnerable sections by ensuring the availability of essential goods. The new measures look to promote consumption of high-value items by employees whose salaries and jobs were unaffected by the Covid-19 pandemic.
The participation of the private sector is also invited to help stimulate growth by facilitating the purchase of non-essential, relatively high-value goods and services in the economy.
Leave Travel Concession Voucher Scheme
The Leave Travel Concession Voucher Scheme provides central government employees with LTC benefits in a block of four years. However, due to the ongoing pandemic, employees won’t be able to avail the LTC in the 2018-21 year block. To compensate, employees will receive a cash payment in lieu of one LTC during this period.
The money will need to be spent on goods attracting Goods and Services Tax (GST) of 12% or more, and only digital payments will be allowed. If the amount isn’t spent, the employee will have to pay tax as per the marginal tax rate on the LTC component.
Boosting the Economy Through the LTC Scheme
As per government expectations, this scheme will generate a demand of Rs. 28,000 crore in the economy. This will further enhance GST collections in the second half of the year, leading to an overall increase in consumption and rise in GST collections.
Festival Advance: A One-Time Measure to Stimulate Demand
The Festival advance was a benefit abolished following the 7th Pay Commission’s recommendations. However, it has been restored for one time till 31st March 2021. All central government employees will receive an interest-free advance of Rs. 10,000 that will be recovered in 10 instalments.
Increase in Capital Expenditure
An additional budget of Rs 25,000 crore has been allocated for Capex on roads, defence infrastructure, water supply, urban development, and domestically produced capital equipment. It is expected that this sum will come from re-allocation of resources.
Concerns Over the New Measures
While these measures have been well-intended, they do invite some concerns. Provisions like buying goods and services worth three times the fare may limit the freedom of consumers in decision making. Additionally, Capex amounts are perhaps too small to have a meaningful impact on economic growth.
Another concern is the limited impact of the measures as they mostly benefit government employees rather than private sector or vulnerable sections. There is a fear that the LTC Voucher Scheme might adversely impact the travel and tourism industry.
Moving Forward
The government is aligning these schemes with the upcoming festive season to spur overall consumption while keeping a check on the expenditure to avoid additional burden on the exchequer amidst a shortfall in tax and divestment revenues. The aim is to direct spending towards items where demand had slumped during the lockdown period. Whether this approach will serve the larger purpose of reviving the demand remains to be seen.