Delhi MCD Election Results 2017

Source: media reports

Govt’s fiscal stimulus plan gets mixed response

Govt’s fiscal stimulus plan gets mixed response
Comment E-mail Print Share
First Published: Sun, Nov 23 2008. 11 50 PM IST
Updated: Sun, Nov 23 2008. 11 50 PM IST
New Delhi: Though several policymakers and analysts want the government to provide a “fiscal stimulus” to the economy to tide over the financial slowdown, some fear that such a measure may prove to be counterproductive and create a credit crunch for the private sector.
“It is not just the usual pump-priming that is being talked about. The government is talking about putting more money in infrastructure and accelerating projects,” says Suresh Tendulkar, chairman of the Prime Minister’s economic advisory council (EAC).
“This is sensible as growth is constrained by the infrastructure sector.”
According to him, the “fiscal deficit as per the FRBM (Fiscal Responsibility and Budget Management) Act, 2003, will be exceeded anyway. But due to the fall in international crude oil prices, the subsidy burden will be reduced. That would generate some additional fiscal space”.
The Act mandates the Union government to reduce its fiscal deficit to 3% of gross domestic product, or GDP, by 2008-09 and eliminate the revenue deficit by the same year, excluding off-budget liabilities.
Though the government had budgeted for a deficit of 2.5% of GDP for the current fiscal, the farmers’ debt relief fund, an increased subsidy burden and additional expenditure allocated through the supplementary demands for grants will significantly push the deficits way beyond the limits set by the Act.
As per a July estimate by the EAC, the budget liabilities could amount to 5% of GDP in the current year, over and above the budgeted fiscal deficit of 2.5%.
Finance minister P. Chidambaram has already said the government will “overshoot” deficit targets this year.
However, there are those who are critical about this approach.
E.A.S. Sarma, a former secretary in the finance ministry in charge of the departments of economic affairs as well as expenditure, says the government should limit its expenditure as per FRBM norms.
“Increasing public expenditure during such difficult times would be counterproductive,” he said. “The government should keep a limit on public expenditure while allowing more borrowing for the private sector. More government borrowing will indirectly create a credit crunch for the private sector. Rather, the government should increase the quality of public expenditure and increase unit output per rupee.”
Tendulkar disagrees with this argument that higher government expenditure will crowd out private investment. Giving the example of the pending National Highways Authority of India projects, Tendulkar said such projects could be accelerated.
“The projects are already in the pipeline. The government could fund certain projects directly and could act as a guarantor for private players,” he said.
Tendulkar also favoured the need to rationalize excise duty. “If necessary, the upper limit of excise duty could be reduced further,” he added.
The government had cut excise duty from 16% to 14% earlier this year.
Credit rating agency Credit Analysis and Research Ltd’s chief economist Soumendra Dash also favours postponing the deficit targets set by the FRBM Act. “If employment, growth and demand are not happening in the economy, what will the government do with zero deficit? The government should postpone achieving FRBM targets by one year. However, the additional public expenditure should be prudently managed,” he said.
Dash argues for additional investment in the infrastructure sector as “that is the only area where a lot of investment could be brought in and employment could be generated”.
Chidambaram had earlier this month said that he is open to “examining” the proposal if any sector of the economy is facing problems.
Comment E-mail Print Share
First Published: Sun, Nov 23 2008. 11 50 PM IST