Fiscal Consolidation versus Infrastructural Obligations

Abstract

This article analyses two important issues pertaining to Indian economy. One is the numerical target under rule-based fiscal correction mechanism being followed by Indian government and second is on infrastructural investment requirements. India lags behind many countries in the world including some of the developing ones both in terms of stock and quality of infrastructure. There exist huge investment requirements in order to foster the economic growth and efficiently utilise the available resources. In the recent years, there is a significant contribution from the private sector towards infrastructural investment. However, private participation is concentrated in few sectors which are commercially viable and hence in the remaining key areas, like rural infrastructure, government is the sole investor. In India, excess spending by the central government is restricted under Fiscal Responsibility and Budget Management Act, 2003 and for the state governments under state-specific Fiscal Responsibility Legislations. The Act limits the fiscal deficit (FD) to 3 per cent of GDP for central government and 3 per cent of GSDP for state governments. FD is capped due to its adverse impact on macroeconomy. However, the available literature shows mixed evidence. Most importantly, revenue deficit (RD) component covers major portion of FD and only a meagre amount is left for capital investments. This article debates whether 3 per cent cap on FD is advisable in all the circumstances and also analyses whether infrastructural investment gap can be filled with available fiscal-deficit amount. This article finds that there is an infrastructural investment gap of ‘5,165.20 billion in the 12th Plan period and concludes that it makes no harm even though FD crosses 3 per cent cap given that amount in entirety is spent on capital formation.