[Editorial Analysis] First steps

Mains Paper 3: Economy
Prelims level: Asian Development Outlook 2020
Mains level: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

Context:

• On Monday, Union Finance Minister announced a set of measures aimed at reviving consumption and investment activity in the economy.

• They follow a two-pronged approach: First, putting money in the hands of government employees so as to incentivise spending, and second, increasing capital expenditure by both central and state governments.

• According to the government’s estimates, these measures are expected to boost demand by Rs 73,000 crore by the end of this financial year.

• Seen against the scale of economic destruction, the measures announced on Monday, while limiting the fiscal costs, are modest first steps.

• They are unlikely to provide any meaningful, durable push to economic activity.

• Yet they signal an acknowledgement on the part of the government of the need for measures to boost demand — and raise expectations that more measures are in the offing.

Spurring capital spending:

• The provisions to boost consumer spending are of two kinds.

• First, the “Leave Travel Concession Cash Voucher Scheme” provides central government employees money in lieu of leave travel concession for the 2018-21 period.

• Employees can utilise this amount to purchase goods and services, subject to the spending being done through digital channels.

• Alongside, the Centre will revive a one-time festival advance scheme giving Rs 10,000 to government employees.

• Conditional upon their adoption, these two measures together are expected to boost demand by around Rs 36,000 crore.

• However, not only do the conditions imposed by the government restrict the avenues of spending, the measures are fairly limited in their scope.

• And it doesn’t address the distress in large parts of the labour market, especially the informal sector.

• The second set of announcements that aim to spur capital spending include a 50-year interest free loan of Rs 12,000 crore to states, and the enhancement of central government capital expenditure by Rs 25,000 crore.

• Considering that the total capital outlay of states was pegged at Rs 5.81 lakh crore in 2019-20 (BE), these loans to states are unlikely to boost capital spending.

• Also, it will be inadequate to offset the shortfall in their tax devolution, though they could be used for clearing pending bills.

• Further, considering that the Centre’s capital spending in the first five months of the year has been marginally lower than last year, to what extent this additional allocation can be released quickly is debatable.

Collapse:

• The GDP data released by the National Statistics Office (NSO) had revealed the extent of the collapse in household consumption and investment in the economy in the first quarter of the current financial year.

• For the full year, the RBI now expects the economy to contract by around 9.5 per cent.

• While the measures announced on Monday will not be enough to offset this loss, they do indicate the intent of the government to push both household consumption and public investment at this juncture.

• These announcements should be the first steps of a broader, more ambitious fiscal package, that addresses the needs of stressed segments of the economy.

Conclusion:

• Finance Minister’s package to revive consumption and investment is modest, raises expectations of more to come.

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Prelims Questions:

Q.1) With reference to the MSMEs, consider the following statements:

1. The government has decided that the relief on waiver of compound interest during the six-month moratorium period shall be limited to the most vulnerable category of borrowers.

2. The borrowers whose compounding of interest will be waived, would be MSME loans and personal loans of up to 10 crore rupees.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: A

Mains Questions:

Q.1) Highlight the recent announcements made by the finance minister to revive consumption and investment activity in the economy. Describe its relevance and key analysis in this regard.

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