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Business News/ Politics / Policy/  Next government should increase productive spending to boost growth: Crisil
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Next government should increase productive spending to boost growth: Crisil

The government's productive spending tends to encourage private investment , says the rating agency

Lower government spending has also had a negative impact on companies wanting to invest in the country, with growth in corporate investment falling from a peak of over 17% in fiscal 2008 to 9% by fiscal 2013. Photo: MintPremium
Lower government spending has also had a negative impact on companies wanting to invest in the country, with growth in corporate investment falling from a peak of over 17% in fiscal 2008 to 9% by fiscal 2013. Photo: Mint

Mumbai: The Centre’s fiscal deficit has narrowed at the expense of productive capital expenditure and the new government’s priority must be to hike spending to boost economic growth, domestic rating agency Crisil Ltd said on Monday.

India’s fiscal deficit shrank from 5.8% of gross domestic product (GDP) in 2011-12 to 4.9% in 2012-13 and further to 4.6% in the last fiscal year as the government ruthlessly cut spending to avoid the risk of a sovereign credit rating downgrade.

“The government can limit fiscal deficit within the target either by raising revenues or by cutting spending," Crisil said in a report. “While large part of the current expenditure is sticky—salaries, pensions and interest payments—cutting unproductive spending on subsidies, mainly on fuels such as kerosene and liquefied petroleum gas, will be necessary."

“This will have to be supplemented through implementation of tax reforms such as GST (goods and services tax), which will improve the government’s revenue position and fund higher capital spending. Therein lies the challenge for the next government," Crisil said.

Crisil said the spending cut reduced expenditure in critical areas like public infrastructure, education and healthcare, meaning it had come at the cost of lower productive spending.

“The cost of this compromise will be felt by the country in the years to come since the government’s productive spending has a multiplier impact on the economy in subsequent years. The new government that will take charge next month must aim to reverse this trend and raise the Centre’s productive spending," Crisil said.

The rating agency estimates that spending on these areas has been lower than budgeted by nearly 1.8 trillion.

“In fact, in terms of per person spending, the government only spent an incremental 110 on productive spending, while it spent an additional 1,900+ per person on other expenditure over fiscals 2013 and 2014," Crisil said.

The lower government spending has also had a negative impact on companies wanting to invest in the country, with growth in corporate investment falling from a peak of over 17% in fiscal 2008 to 9% by fiscal 2013.

“The government’s productive spending tends to encourage private investment by creating necessary physical infrastructure and raising productivity of labour by improving their levels of education and health. Lower productive spending by the government in the past couple of years added to already slowing growth and policy hurdles that caused delays in project clearances and, thus, discouraged private investment," Crisil said.

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Published: 28 Apr 2014, 07:37 PM IST
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