Social spending plan not a good idea: Harvard economist

The new Indian government's plan to spend huge money on social programmes will not augur well for the Indian economy, according to Robert J Barro, Paul M Warburg professor of economics, Harvard University.

"Big spending on social programmes will be a big minus (for the Indian economy). The country needs to be pro-market and liberalise trade and imports."

Barro, who is on his first visit to India on the invitation by ICICI Bank, will lecture on the determinants of Indian economic growth in New Delhi on Wednesday.

He will deliver a pre-dinner lecture on the US economic outlook "" including interest rates, monetary, tax policies and the fiscal deficit "" in Mumbai on Thursday.

A senior fellow of the Hoover Institution of Stanford University, Barro said India could not grow like a champion over the last five decades because it embraced socialism and was unfriendly towards the markets and capitalism.

"In the 1990s, the country started moving in opposite direction and slowly it paid off."

If the new government goes back to the path of socialism, it will be a big "negative". "It will not encouraging economic growth. It will only worsen the fiscal deficit and financial markets will turn volatile," Barro said.

According to him, large fiscal deficit is a major concern. "When you spend more on social programmes, it can only worsen the fiscal situation," he warned.

"About 7-8 per cent of consolidated fiscal deficit of the Centre and states (against the 10 per cent now) and about 2 per cent inflation rate should be ideal at this point of time for the Indian economy to grow"

Coming down highly on US' "lack of commitment on free trade", Barro said the US outcry on outsourcing is losing its steam. Dubbing it as another form of "protectionism" for trade in services, he said "outsourcing is less of an issue in political campaigns."

Barro is fairly certain that the interest rates in the US will start climbing up.

"I see the Fed's funds rate rising to around 3 per cent over the next one-and-a-half year. There could be a series of hikes of 25 basis points each. It could start from the next Fed meeting," he said.

Personally, however, Barro favours a one-shot rise in the rates instead of the expected gradual approach.