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Coronavirus

India unveils new measures to spur domestic demand

Government hopes coronavirus-hit economy will see $10bn boost

A health care worker in protective gear swabs a construction worker for a rapid antigen test at a construction site in Ahmedabad.   © Reuters

NEW DELHI -- Indian Finance Minister Nirmala Sitharaman on Monday announced new measures to boost domestic demand by about 730 billion rupees ($9.95 billion) as Asia's third largest economy continues to battle the coronavirus pandemic, including extra capital spending on infrastructure projects and festival season schemes for government employees.

The central government will spend an additional 250 billion rupees on roads, defense infrastructure, water supply and urban development projects in the year ending in March, she said at a media briefing, adding that states will also be given interest-free, 50-year loans totaling 120 billion rupees for "new or ongoing capital projects."

The government is hoping to boost consumer spending by 360 billion rupees by giving its employees vouchers that are exempt from income tax in lieu of their travel allowances this year that they can spend on items such as television sets and washing machines. These employees will also be given a one-time advance payment of a portion of their salaries for the upcoming festive season, which includes the major Hindu festival of Diwali next month.

"We assess the total boost to the demand [at] about 730 billion rupees. All this is to be spent before March 31, 2021," Sitharaman said.

The pandemic has adversely affected the economy, and the needs of the poorer and more vulnerable of the population "have been addressed somewhat" under schemes such as the Atmanirbhar Bharat or self-reliant India package, she said. "Supply constraints have somewhat eased but consumer demand still needs to be given a bit of a boost," she said.

In May, Prime Minister Narendra Modi unveiled the Atmanirbhar Bharat economic package worth 20 trillion rupees, which is equal to about 10% of the country's gross domestic product, to help with the fallout from the pandemic.

"The measures will boost demand, investment and supply," said N.R. Bhanumurthy, vice chancellor of the Bangalore-based B.R. Ambedkar School of Economics University. "The only worry that I would have in the short term is that there may be some spike in inflation."

Retail inflation in August stood at 6.69%, above the Reserve Bank of India's medium-term target range of 4-6% for the fifth straight month, mainly because of supply-side issues.

Monday's announcement comes after India's GDP contracted 23.9% in the April-June period, the worst quarter on record. RBI has projected that the economy will shrink 9.5% for whole fiscal year ending in March, owing to the pandemic that severely impacted economic activity.

India is the world's second worst-hit country by the pandemic after the U.S., and has so far reported 7.12 million infections and 109,150 deaths. It imposed a strict nationwide lockdown on March 25 to curb the spread of the virus but has since been gradually reopening the economy and easing restrictions in parts of the country that have not been deemed high-risk.

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