Stimulus package 3.0
On Diwali eve, with the economy still deep in the red, the Centre has rightly decided to back the housing sector as the engine of revival. In its third stimulus package since May, the Centre has decided to give an income tax break to home buyers and sellers and increase the allocation by Rs 18,000 crore under the urban component of the Pradhan Mantri Awas Yojana. A boost to urban housing will work as an employment programme for the workforce that was forced to flee the cities in the wake of the pandemic. Along with the PM Garib Kalyan Rozgar Yojana and the MGNREGS, the creation of rural infrastructure and urban housing can proceed apace, while lifting demand for housing improves, the current stimulus has waived tax for a difference of up to 20 per cent between the circle rates and market rates.
A buyer will not be taxed for 'other income', and the seller will be taxed at the sale price if it is within this band. When seen along with the attractive home loan rates and the interest subsidy on loans under the PMAY, an increase in housing stock can boost demand. It can spur core sector revival. As for apprehensions over sentiment, housing loans were up 8.5 per cent in September this year over the last year, pointing to transmission of repo rate cuts as well as possibly a belief among buyers that the prices are attractive enough to be funded by future incomes. However, the stimulus packages are likely to be much less than 15 per cent of the GDP. With the borrowing limit likely to remain in the region of Rs 12 lakh crore, given the tight revenue situation, it can be surmised that the increase in allocations in some areas will be balanced by a pruning of other expenditures.
While this is prudent, the Centre should give a clearer account of its budgetary plans. Even as the Emergency Linked Credit Guarantee Scheme has been extended to cover larger players eligible for restructuring under the Kamath panel, it is unclear why tiny units relying on informal sources of credit continue to be left out. This is despite reports of a freeze and collapse of confidence in the informal lending space. Notwithstanding the Rs 900-crore outlays on vaccine research, higher outlays on health infrastructure should be considered for its potential, like housing, to revive the economy. Any economic uptick would depend on how soon the pandemic can be controlled. It is important that investment picks up in sectors that are 'inelastic' to its spread. With COVID still largely an urban phenomenon, both rural and urban sectors deserve economic emphasis. The government can also give financial aid to companies tied to the number of people they employ. Loans given at lower interest rates to businesses that hire more people, in key sectors. So, this will increase output and create jobs, and stimulate consumption demand. But all this assumes that COVID is under control and we won't see another round of infection.
The unveiling of Aatmanirbhar Bharat 3.0 stimulus package worth Rs 2.65 lakh crore, a couple of days before Diwali, has coincided with the release of the RBI's sobering report that mentions an unprecedented occurrence. India entered a technical recession in the first half of 2020-21. The term is for at least two successive quarters. Indian economy, which suffered the worst ever contraction of 23.9 per cent in the lockdown hit April-June quarter, witnessed its GDP shrink by 8.6 per cent during the July-September period, as per the central bank's nowcast. The International Monetary Fund has forecast that the overall contraction in India's economy will be around 10 per cent for the ongoing financial year. These are bleak figures, but the silver lining is that the worst seems to be over. India's hopes of a turnaround rest on the current quarter, which is seeing near normal economic activity as the festive season is in progress, even as a fresh surge in COVID-19 cases is threatening to disrupt the momentum. Though it is wishful thinking to expect positive growth in this three months period, the government needs to go all out to come close to the target with more proactive steps.
From real estate to manufacturing, virtually no sector has been left unaddressed in terms of incentives and concessions, but much depends on boosting the confidence of consumers and investors. Spurring consumption has to go hand in hand with better handling of the pandemic. During the lockdown, the prevailing uncertainty forced people to save rather than spend. As per estimates, household financial savings rose to 21.4 per cent of the GDP in April-June, mostly bank deposits, up from 7.9 per cent in the corresponding period a year ago. The pent up demand is getting released now, but whether spending will remain high even after the festive season is over is a moot point. Consolidation of the gains from the cumulative stimulus package, amounting to almost Rs 30 lakh crore or 15 per cent of the GDP, will determine how quickly and strongly Indian economy makes recovery.
Chandan Kumar Nath,