Finance Minister Nirmala Sitharaman on Monday unveiled measures to provide a short-term demand boost for the economy that adds up to ₹73,000 crores. The first ₹37,000 crores of this will be through extra capital expenditure by the Centre and states and ₹36,000 crores by simulating consumer demand. The latter will be transmitted through two categories: an LTC (leave travel concession) vouchers and a one-time festive advance.
The short-term nature of this push comes from the last date by which most benefits under these new announcements need to be claimed - March 31, 2021, which is the end of the ongoing financial year. The measures are a way to revive GDP growth after 23.9% year-on-year contraction in the economy in the first quarter of the ongoing financial year attributed the COVID-19 induced national lockdown, and the Reserve Bank of revealing on Friday that it estimates that the economy will contract 9.5% in financial year 2020 - 2021 (FY21).
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Here's a walkthrough of the what Sitharaman announced
LTC Cash Voucher Scheme
Employees can avail of LTC in a four-year (calendar year) block. The current block runs from 2018 - 2021. The government has said that employees are not in a position to avail of the LTC due to COVID. The LTC provides air or rail fare (as per entitlement/pay scale) to government employees, and a 10-day leave encashment (equaling pay plus dearness allowance).
Under the announcement, in lieu of the LTC, a cash payment will be made to central government employees, including PSUs:
- Full payment of leave encashment will be provided
- The fare will be provided in 3-flat slabs depending on entitlement/pay-scale. The fare will be tax free.
To claim the payment, an employee must:
- Make a purchase worth 3x the fare offered and 1x (equal) to the leave encashment
- Purchase goods from a certified GST vendor attracting 12% GST or more
- Make the payment through digital means before March 31, 2021, and produce a GST invoice.
The cost to the central government will be around ₹5,675 crores for central employees and ₹1,900 crores for CPSU employees. However, the demand infusion by the centre is expected to be ₹19,000 crores and by the state is expected to be ₹9,000 crore; thus the total estimated demand through this measure equaling ₹28,000 crore.
The government has extended these provisions to the private sector, and expects potential private sector spending to generate another ₹28,000 crore in demand.
Festive Advance
The government has unveiled a new festive advance scheme with an estimated worth of ₹8,000 crores.
The festival advance was disbanded by the 7th Finance Commission (which is ongoing), but the government is bringing it back as a one-time provision. Under this, central and state government employees can avail an interest-free loan of upto ₹10,000 until March 31, 2021. This loan is repayable with a timeframe of up to 10 months. The loan will be provided through a prepaid RuPay card which cannot be redeemed into cash, but can be spent on anything desired, with the government bearing all charges in this regard. The announcement will not cost the exchequer, as the advance will be recovered. The government says this will boost digital payments and tax collection.
The ₹8,000 crores push can be divided into
- The Centre, expected to disburse ₹4,000 crores
- The states, provided the remaining ₹4,000 crore impetus
Capital expenditure
The government has stated that long-terms capital expenditure will have a multiplier effect on the economy.
To provide this impetus, it has extended a ₹12,000 crore interest-free loan to the states with no repayment or installment for 50 years. Of this:
- ₹2,500 crores will go the North-East (₹1,600 crores) and Uttarakhand and Himachal Pradesh (₹900 crores jointly)
- ₹7,500 crores to other states in proportion to their Finance Commission devolution. 50% of this will be initially provided and the balance after using the first installment. Unused funds will be reallocated.
- ₹2,000 will be provided to state who meet 3 of the 4 reform reforms under 'Aatmanirbhar Bharat' guidelines
States can spend these funds on any ongoing or new capital project; for supplier or contractor payments or to settle outstanding capital expenditure dues. States must make the payment by March 31, 2021.
The Centre, on the other hand, has committed to ₹25,000 crores additional budget on roads, defence infrastructure, water supply and urban development. The allocation will be made in the revised budget estimates to be made in October - November.
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Note: This story has been updated to reflect a festive 'advance'.