Infra, social sector spending to go up

RUN UP TO THE BUDGET 2008-09

Owing to the impending general election next year and the impact of a recession in the United States on India's growth, a senior government official said a fiscal stimulus package is likely in the coming Budget.

The stimulus could involve a major ramp up in public expenditure in order to enhance physical infrastructure and increased social sector spending. Analysts add that a fiscal impetus can also be provided through a cut in indirect tax rates.

"If you are looking at a slightly recessionary environment, you would naturally look at some degree of fiscal stimulus. And if there is an election down the lane, you would be using the same instrument in the same direction. So it appears there is a common meeting ground," the official told Business Standard.

Asked whether the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, would come in the way of such a stimulus, the official said: "It is not necessary for the government to dwell on the fiscal constraints. It (the finance ministry) can simply say that a fiscal stimulus is being given."

The FRBM Act mandates the government to decrease the fiscal deficit to at least 3 per cent and reduce revenue deficit to zero by March 2009.

However, the Planning Commission has, in recent times, openly opposed constraints on public expenditure, saying it substantially limits the government's ability to fund flagship initiatives aimed at developing rural infrastructure and creating more jobs among other schemes.

"The government may provide a fiscal stimulus, but it should be done without sacrificing FRBM targets. Past experience has shown that higher transfer payments have not increased productivity capacity within the country. The government can also reduce incidence of indirect taxes, which stands at 30 per cent in India, as compared with 17 per cent in China," said Rajiv Kumar, director, Indian Council of Research in International Economic Relations (ICRIER).

Public expenditure is expected to be sharply raised in the coming Budget. While the total Budgetary support for the central Plan increased by 22 per cent during 2007-08 (Budget estimate) as compared to 2006-07 (revised estimates), the 11th Plan (2007-12) envisages a 125 per cent increase in budgetary support for ministries and departments.

The Prime Minister's Economic Advisory Council, headed by C Rangarajan, has also called for increased public expenditure during 2008-09.

The total Budget support for the central Plan increased to Rs 1,54,939 crore (Budget estimate) during 2007-08, up from Rs 1,26,510 crore (revised estimate) in 2006-07. The Planning Commission has projected that the central government's budgetary support for central ministries will increase to Rs 1,096,860 crore during the 11th Plan, as compared to Rs 486,798 crore in the 10th Plan.

However, other analysts feel that there is a limit to which government can open its purse strings. "If there is a decline in the GDP growth rate, the tax buoyancy will not remain the same. Due to rupee appreciation, the import tariff collection will also get affected.

The impact of the recommendations of the Sixth Pay Commission will also be an additional burden," said Abheek Barua, chief economist, HDFC Bank.