Infrastructure funding critical, says Montek

Montek says govt can justify increase in fiscal deficit targets.

Planning Commission Deputy Chairman Montek Singh Ahluwalia today said the government could seek special permission from Parliament to rework its fiscal deficit targets in case it decided to use part of the foreign exchange reserves to fund infrastructure projects.

The Fiscal Responsibility and Budget Management (FRBM) Act specifies a fiscal deficit target and requires an explanation to be made to Parliament if there is any deviation from the milestones specified.

Ahluwalia said such an increase in the fiscal deficit target could be justified as it would be on account of infrastructure funding and not any non-productive expenditure.

Speaking at the annual conference of the Confederation of Indian Industry (CII) here today, he said the increase in deficit would have to be monetised to ensure it does not crowd out private investment. This would require the RBI to buy bonds and release funds, Ahluwalia said, adding that utilisation of these reserves would ensure that it does not result in inflation. Imports and increase in demand in the economy could, however, raise the prices of tradable goods.

To control the prices of tradables, the government could appreciate the exchange rate or reduce customs duties to encourage imports. The latter would be a more feasible option, he added.

One possible option would be to set up a fund, which would subsequently dole out money for infrastructure development, Ahluwalia said.

The money could be given as grants and/or loans to bodies like the Railways and the National Highways Authority of India. The government could operationalise a scheme in the next Budget, he added.

Utilising $5 billion of reserves in an year would translate into an annual inflow of approximately Rs 23,000 crore, of which about Rs 13,000 crore would be used for central infrastructure and Rs 10,000 crore would be available for state-level infrastructure.

The priority areas before the government were roads, irrigation, power and urban reforms, he said, adding the states needed to be provided with incentives in order to undertake reforms in these sectors.

Health and education were two sectors which needed additional public expenditure but were the responsibility of the state governments.

"As the financial position of many states is not good, the Centre would have to chip in. However, additional funds alone would not do the trick... we will have to look at systematic changes in delivery systems, including providing funds directly to local bodies," Ahluwalia said.