Fiscal deficit for the first two months of FY16 at 37.5 per cent of the full year target is a result of the government channelising higher spending towards capital expenditure to increase in productivity, India Rating and Research (Ind-Ra) has said. Government’s planned expenditure on capital account for April-May rose 32.5 per cent to Rs.183 billion and total planned and non-planned spending towards creating assets went up to Rs.377.4 billion. Higher planned expenditure indicates rising public investment in developmental projects. Evidence shows that such government expenditure also triggers private investment.

Fiscal deficit on an absolute basis was Rs.2.08 trillion for April-May 2015 and declined 13.3 per cent y-o-y. Ind-Ra believes that the pace of expenditure towards creating assets needs to be maintained unlike in the last two years where the government cut down on planned spending in the third and fourth quarters to meet the targeted fiscal deficit.

Investment growth turned negative 0.3 per cent in FY13 after averaging 11.3 per cent during FY10-FY12. Although it recovered somewhat to 3.0 per cent and 4.1 per cent in FY14 and FY15, respectively, it is nowhere near the average investment growth of 16.3 per cent witnessed in the three years prior to the global financial crisis of 2008.

Private investment and bank lending remain weak but government spending has picked up, looking at the projects being awarded by National Highways Authority of India. Expenditure on power is also increasing. The ratio of projects under implementation, which are stalled public projects, declined from 5 per cent in June 2013 to 4 per cent in March 2015. Also, the government has allowed NHAI to provide funds to those stalled projects which are near completion. This will also provide support to road projects. The Cabinet Committee on Economic Affairs approved road projects worth Rs.178 billion during April-June 2015.

The government has managed to bring down the fiscal deficit as a percentage of GDP from 5.3 per cent in FY13 to 4.1 per cent in FY15. GDP growth in the medium term may be higher than expected if the pace of capital expenditure is maintained for the rest of the year and beyond along with containing fiscal deficit at current levels.

Given the current conditions of banks with stressed loans (non-performing plus restructured) rising to 11.1 per cent and credit growth at sub 10 per cent, the ability of private corporates to invest is limited. Thus, while bringing down the fiscal deficit is important for macroeconomic stability, accelerating growth is equally important. Ind-Ra believes that at the current juncture a marginal fiscal slippage by increasing capital expenditure should not be viewed adversely.

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