Issue 17- On consumption, automobile leasing, and location based pay

In today's Finshots brief, we will discuss-

• The Indian government's latest attempt to create consumer demand
• Why automakers are exploring subscription models for cars
• Why working from home may lead to pay cuts for tech workers

The Government’s latest Demand Booster

Back in March, India imposed one of the strictest nationwide lockdowns in the world leading to thousands of businesses being shut down, income levels deteriorating, and consumer demand for goods and services taking a sharp downturn. Now, this is extremely problematic, considering that consumption makes up about 60% of India’s GDP. So now that the economy is reopening and the festive season is fast approaching, the government is looking to expedite its efforts to get demand back on track.

But at the same time, they have spending constraints. They are already on track for a record borrowing spree this year, and spending money that’s not there in the nation’s coffers is just not feasible. As Finance Minister Nirmala Sitharaman puts it- “Today’s solution must not cause tomorrow’s problem.”

Despite this, the government has come up with a scheme to create demand in the economy. And here’s what it's all about-

Employee Focus

The first part of this centers around a kind of allowance that salaried employees are given- Leave Travel Concession (LTC). Every 4 years, central government employees get LTC for any destination of their choice, plus one for their hometown. However, in current times, travelling anywhere is not on anyone’s priority list. And so, the government has decided to give its employees the fare they’re entitled to as cash vouchers. But it’s not exactly free money. It can only be spent on things that attract a GST of 12% or more, before 31st March 2021. These purchases can’t be food related, and the payment has to be made digitally.

Through this, the government expects to create a demand infusion of Rs. 19000 crore, with a further Rs. 9000 crores if even half the state governments adopt the scheme.

In addition to this, central government employees will also get a special festival advance. Here, they’ll be eligible for an interest free loan of Rs. 10,000 in the form of a pre-loaded Rupay card. The amount spent on the card will be recovered in 10 equal installments, while the balance will lapse after 31st March.

Capital Expenditure

The government is ready to extend Rs. 12,000 crores worth of interest-free loans to states for a period of 50 years. Of this, Rs. 2,500 crore will be set aside for North Eastern States, Uttarakhand and Himachal Pradesh, while Rs. 7500 crore will be given to the others. Additionally, Rs. 2000 crore will be given to States that manage to complete 3 out of 4 reforms under the Atma Nirbhar Bharat plan. All these loans will have to be spent on new or ongoing capital projects.

The government will also put aside Rs. 25,000 Crores for capital expenditure on roads, defense infrastructure, water supply and urban development.

Through these measures, they expect to create demand of more than Rs. 1 lac Crores in the economy. Woah!

Lease-a-car

For the past two years, Indian automakers have been dealing with the worst slowdown in their industry. And when the pandemic arrived, things got much worse. So now, manufacturers like Maruti Suzuki, Hyundai, Tata Motors, Volkswagen are looking for out-of-the-box ways to get young people to switch to using personal cars. And one area they’re exploring is car subscriptions.

Here, customers can get a car on lease for a year or more. They don’t have to worry about upfront payments, insurance, maintenance or road tax. And after the lease is up, they can choose to extend it, return the vehicle, or even buy it. No difficult paperwork. No heavy down payment. No hard commitments. As the pandemic has severed the budgets of most consumers, the timing for such a product is perfect.

The model is not exactly new- startups like Zoomcar and Revv have already made some headway here. But it’s still an extremely small market. According to Vinkesh Gulati, president of the Federation of All India Dealership Association, less than 1% of the 28 lakh passenger vehicles sold in India in the fiscal ended March 2020 were taken on lease.

And it’s not hard to see why. Most experts contend that paying lease rentals is actually costlier than buying a car. For the highest tenure of 48 months, it's almost 50% more expensive. And as the duration gets shorter, the rent gets higher. So if someone is ready to commit for a long duration, they might be better off buying a car and paying EMIs on it.

Location Vs. Compensation

By and large, the coronavirus has changed the perception that employees have to work in close proximity to each other in order to do their jobs effectively. Work from home is the new normal, with companies like Facebook, Twitter, and Microsoft having announced that they’re looking to establish remote work more permanently even after the pandemic is over.

This means Silicon Valley in San Francisco, which has an extremely high cost of living, may soon see a lot of its tech workers move out. Well, these workers certainly have the tools and tech to make remote work convenient. But they’re also grappling with a hard reality- that their location may influence their compensation.

The idea here is simple- The San Francisco Bay area is much costlier than most other states. So, if they decide to move, it’s only fair that their pay should reflect their actual cost of living. According to an October survey of 240 US tech companies by Sequoia, about 22% are readjusting salaries based on locations.

Even for workers, the finances make sense. With a pay cut, engineers can have a higher standard of living in states like Austin, Texas, or Nashville, compared to San Francisco. As Brian Kropp, research chief of the human-resources practice at Gartner says, “The cost of living usually falls more than the paycheck.”

Even so, many employees have a negative reaction to the idea of location based pay. You see, with free massages, unlimited food, and the best entertainment options, tech companies have a habit of going above and beyond to make their employees’ lives comfortable. And as such, the idea of the same companies penalising them for moving away is unpalatable to them. Kropp calls this reaction “more emotional than rational.” Well, it is what it is.

Taking a Stand

Yesterday, Parle announced that “they will not advertise their products on toxic and aggressive Indian media channels.” Here’s what this means.

Learning & Earning Loss

According to a World Bank Report, the prolonged closure of schools due to the COVID-19 pandemic may cause a loss of over $400 billion in India’s future earnings. Know more.

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-Written by Vedika Agarwal and Akshay Tater