Indian industry welcomed measures to boost spending in the economy with the government providing a festival advance plan to its employees as well as advancing a 50-year loan to states.
However, the measures would only have a modest impact and would fall short of a bigger push needed to revive growth over the medium to long term, economists said.
The government said it will provide Rs 10,000 interest-free festival advance to all its officers and employees as well as cash vouchers in lieu of Leave Travel Concession.
“Finance Minister Nirmala Sitharaman’s announcement on boosting demand through a two-pronged strategy will provide a huge impetus to spending both by consumers and governments which in turn will accelerate economic activity,” said Chandrajit Banerjee, director general of the Confederation of Indian Industry.
“I think, the measures, coming ahead of the festive season both for leave travel concession and the advance to all government employees to spend on goods will boost demand in the economy that will propel better capacity utilisation and production in factories,” he added.
Dr Sangita Reddy, president of the Federation of Indian Chambers of Commerce and Industry (FICCI), said that the measures would cumulatively amount to Rs 1 lakh chore and “this is sizeable.”
She said that they had suggested the use of consumption vouchers as a policy tool to prop up demand in the economy and by leveraging the Leave Travel Component of government salaries there would be a strong incentive for people to advance their purchases over the next six months.
Dr Reddy said that they hoped to see the economic growth in the positive by the fourth quarter of the fiscal year end March 2021.
India’s economic growth is expected to shrink by 9.5 % in the current fiscal year, according to the Reserve Bank of India (RBI).
Growth expected by fourth quarter
However, the growth is expected to emerge in the positive by the fourth quarter, RBI Governor Shaktikanta Das said in a policy speech last week.
The RBI had also announced a number of measures to boost liquidity to support a revival of the economy,
Sujan Hajra, chief economist at Anand Rathi Securities, said that its not surprising that a turnaround would happen in the fiscal fourth quarter, given that the growth in the corresponding period might be near zero due to the pandemic.
“Obviously the demand booster was something that was required. Having said that the total amount of boost is not particularly high and even in the best scenario won’t add up to any significant number,” he added.
He said the measures to put more money in the hands of government employees amounted to front-loading of government spending rather than extra spending.
“The concerns on fiscal side continues and that is something holding back the government from far more aggressive fiscal measures,” Hajra said, referring to likely loss of tax collections in light of the pandemic’s impact.
Meanwhile, latest government data showed that the retail inflation based on the consumer price index had accelerated to 7.34% in September from 6.69% the previous month.
That is above the RBI’s comfort level for the sixth consecutive month, but the bank’s governor Das said last week that he saw the high inflation as temporary because the country was heading for a record summer crop harvest.