Arvind Panagariya backs higher deficit for better growth

Columbia University professor Arvind Panagariya, who is in the race for the heading the Prime Minister's Economic Advisory Council, wants the government to step up expenditure on infrastructure even if it entails a higher fiscal deficit in the next Budget. According to Panagriya, the only way for the new government to break the low- growth- high- inflation cycle is to restore growth to the seven- to- eight- per cent level.

"In an economy where you are trying to push up the growth rate, a fiscal deficit of 4.5 per cent of GDP is fine," Reuters quoted Panagariya as saying.

Raise expenditure

The former Asian Development Bank chief economist is of the view that the 4.1- per cent fiscal deficit that the finance ministry has in mind "is unrealistic". Outgoing Union finance minister P. Chidamabaram has, in fact, come under severe criticism for slashing productive expenditure and pushing subsidies on to this fiscal merely to window- dress the fiscal deficit figure. Panagariya said that the new government should not to be unduly worried about a small fiscal slippage and suggested it use the room to boost infrastructure spending.

"I would say raise capital expenditure from 1.76 per cent of GDP to two per cent." Interestingly, Arun Shourie, a contender for the post of finance minister in the Narendra Modi Cabinet, also said that achieving a " 4.1- per cent deficit was impossible". However, a higher deficit could increase the risk of a sovereign credit downgrade as Standard & Poor's has rated India at BBB- with a negative outlook.

According to Panagariya, in the longer run, accelerating and sustaining growth will require reforms in labour market, land acquisition and infrastructure building, especially, roads, railways and electricity.

As the economy transforms, urban development will also need speeding up.

Panagariya wants the new government to introduce the proposed direct tax code beginning April 1, 2015, and the nationwide Goods and Services Tax from April 1, 2016.

While both the measures are expected to boost government revenues by improving tax compliance, they have been pending for years for want of a political consensus.

Courtesy: Mail Today