In today's Finshots, we talk about the government's new plan to revive demand.
How does one revive the economy?
It’s a complicated question especially considering the pessimism surrounding Covid-19. People aren’t spending like they used to. Businesses aren’t investing like they used to. And there is a very real risk that India might slip into a recession and stay there for a while. So its incumbent on the government to do something. They have to instil confidence in people and businesses and they have to do it now.
But how do you spur demand when there’s so much doom and gloom surrounding the economy. The national unemployment rate is at 8.35% (as on August). While it’s better than the 23% we saw back in April, it's quite likely that these people are entering the workforce at lower wage rates. Also, Jan Dhan accounts tell you that people are preparing for the worst. They are saving record amounts of money and aggregate bank deposits have increased by ₹6.8 lac Crores since April 2020, compared to an increase of ₹1.5 lac Crores in the same period last year. And while you can’t fault people for being prudent, this demand slump has catastrophic consequences for everyone involved. So the only option now is to get people to spend. Put money in their hands and force them to spend even if they didn't want to and that’s precisely what the government tried to do yesterday. But first a note on LTC.
Understanding Leave Travel Concession (LTC)
The government thinks all its employees deserve to go out and enjoy a nice vacation every now and then. And in a bid to incentivize them, the state also offers these employees paid leaves and they compensate them for any additional travel expenditure they might incur. Obviously, there are caps and restrictions on how you can use and claim these benefits but the underlying premise is simple — Govt employees need leisure time and a small portion of their salary component ought to be reserved for this purpose.
But what happens when you can’t travel or you don’t want to? Well, in that case, you can encash the LTC benefits i.e. take cash upfront. Once again there are caps and limits on how much you can encash but that provision is still available.
But what happens when you want to travel, but can’t do it because of a pandemic. That is a unique situation and deserves special consideration. So the government has an exciting proposal for all the employees who haven’t been able to go on those vacations and travel to their heart’s content. If you have leaves you won’t be able to put to good use, then you can ask the government to be paid in cash. After all, you were promised to be paid for these days even if you didn’t work. And a promise must be kept. And those travel benefits? Well, you can encash them too. But the exact semantics and the calculations involved are slightly complicated. We don't quite understand how it's done. But we promise we will get back to you. Maybe tomorrow.
But what we do know for certain is that you must spend actual money before you can claim and encash your LTC. And you can only spend it on items that attract a GST of 12% or more. Also, it will have to be a digital transaction and you’ll be expected to provide an invoice. So yeah, it’s not going to be a walk in the park.
But the government wasn't finished. They also announced a special festival advance scheme and it’s quite interesting actually.
So the story goes that all central government employees can now avail an interest-free advance of ₹10,000 in the form of a prepaid RuPay Card. Meaning it’s not free money. It’s simply a loan of sorts and the government will recoup the full principal eventually. Also, you can’t plonk it in your savings account since it’s on a prepaid card remember? So technically you’ll be forced to spend it and you’ll have to do it by March 31st 2021, at which point I am assuming the card will stop working. The government also promised to offer loans worth ₹12,000 crores to states in a bid to get them to spend on land, machinery, and people. The hope is that all of this spending will put a dent on the aggregate demand and help India recover from this crisis.
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