Centre’s 'conditions apply' fiscal stimulus constitutes only 0.2% of GDP, says SBI report

The fiscal stimulus measures announced by Union finance minister Nirmala Sitharaman on Monday will account for only Rs 40,000 crore maximum additional cash outgo from the Centre during the current fiscal, which is around 0.21 percent of GDP, an SBI research report said on Tuesday.

“After a long clamor for fiscal stimulus the Government today came up with measures with direct fiscal support to people and states and to generate demand. However, the announcements have come with a "conditions apply" tag,” Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, said in the report.

Sitharaman announced a slew of measures to stimulate consumer demand and offer capital support to states. These included LTC Cash Voucher Scheme for Government employees, Special Festival Advance Scheme of Rs 10,000 to Government employees for festivals upto 31.3.2021 and a Rs 12,000 crore interest-free 50-year loan to states for spending on capital projects in a bid to boost the economy.

“We believe only around 10-15 percent employees would use the LTC Scheme. In case of festival advance assuming it is taken in November and since it is returned in maximum of 10 instalments, four instalments will be paid back in this fiscal, thus leaving a burden of Rs 2400 crore to the exchequer, SBI’s Ghosh said.

Further capital expenditure will lead to Rs 25,000 crore cash outgo for Centre’s budget allocation and Rs 12,000 crore loan for States, Ghosh said.

“Taking all these into account, Rs 40,000 crore is the maximum additional cash outgo of the Centre during the current fiscal, which is around 0.21 per cent of GDP. The last stimulus package had a cash outgo of Rs 2 lakh crore or around 1 percent of GDP. Let us hope these new measures are not a case of too little too late,” Ghosh said in the note.

In the case of LTC scheme, it is doubtful how many will avail this scheme as if the person availing this also has to pay GST amount out of his/her pocket then it will be a burden on the person and in fact he would be better off paying taxes on the amount availed by him, Ghosh said.

“The scheme is unlikely to work unless the Government decides to pay GST component also over and above the fare entitlement amount as is done by many PSBs. Further since LTC covers not just the employee but the dependent family members, the draw down on the personal income will be huge,” Ghosh said.

For instance for employee eligible for business travel get two way fair value of Rs 36,000. For a family of four this works out to Rs 1,44,000. The total expenditure works out to Rs 4,32,000 plus GST amount of Rs 1,03,680, the report said.

According to the note, the festival advance scheme is akin to the interest free advance provided to certain public sector bank employees, in which they receive one month’s salary which is repaid in 12 interest-free installments.

Out of the two schemes, it is only in case of the festival advance proposal that one can think there is some additional income over and above the current income. This is where one can expect demand will get a boost by way of discretionary consumption, Ghosh said.

“However, the consumption boosting proposal ignores the vital fact that rise in savings is due to curtailment of discretionary consumption in higher fractile groups. The fractile group that is targeted under proposal have higher marginal propensity to save and any additional savings is more likely to be not consumed,” the SBI note said.

As for the interest-free loan to states, SBI's Ghosh said  the Rs 12,000 crore is minimal given the fact that this amount is only 1.6 percent of states FY21 budget estimate of capital expenditure of select 18 states.

In a separate note, Emkay Global economists said the pre-festive package, which has come in small doses is an earnest attempt to revive demand; however, the package is not likely to be sufficient to move the needle.

“The recovery in demand is likely to be ephemeral and thus not likely to be reflationary in nature, i.e., having a low demand push impact on inflation. In addition, we have witnessed job losses of ~19mn in salaried class - revival in that demand would require more aggressive steps by the govt,” Kruti Shah, an economist at the Emkay note said.

Indian economy is projected to contract by 9.5 percent in the current fiscal, the RBI said in its recent monetary policy. The government, early this year, came with a Rs 20 lakh crore economic package to stimulate a Covid-hit economy but the package failed to impress many as the actual direct spending was very little.