Broking firm Edelweiss says there is a strong case for the government to step up public spending in the Budget as demand is weak, inflation and current account deficit risks are low.
"The government may be on a weak footing on tax revenue, but is rich in asset base," said the Edelweiss pre-Budget note.
"Priority should be accorded to social and physical infrastructure, agriculture and PSU banks’ recapitalization," the note says.
Five reasons according to Edelweiss on why the Finance Minister should give priority to growth rather than fiscal consolidation in the upcoming Budget
1. Private business cycle remains weak. There is large indebtedness in the infrastructure sector and the manufacturing sector is operating with considerable idle capacities. The government needs to step‐up spending in infrastructure—roads, railways, metros, education etc—where there is no overcapacity and are not influenced by global factors.
2. States may be forced to cut back on development spending because of a drop in tax revenues from oil and land transactions. In addition, UDAY power sector reform and wage hikes (due to 7th Pay Commission recommendations) will stretch state finances further.
3. In 1999-2004, the aggregate fiscal deficit of Centre and states averaged around 8-9 percent, but retail inflation remained well contained around 4 percent despite continued price hikes in retail fuel prices. Ironically, retail inflation accelerated to worrying levels during 2005‐08 (as global metals, food and oil prices skyrocketed) despite sharp fiscal consolidation during the same period.
4. Bulk of the fiscal consolidation from FY12 to FY15 has been achieved through decline in expenditure to GDP ratio rather than upturn in tax/GDP ratio. The main brunt of consolidation has been borne by development expenditure such as education, health, rural development. Continued retrenchment in these critical areas can hurt medium‐term growth prospects of the economy.
5. The quality of government spending is not unproductive as was the case in 2009-11 where subsidies had expanded sharply. The government should relax fiscal targets use additional fiscal space created to enhance public infrastructure, be it rural roads, national highways, railways, irrigation, rural housing, PSU bank recapitalization, GST compensation etc. Such spending will help economic growth without undermining the inflation outlook.