The government can borrow more to revive investment cycle even at the cost of marginally slipping from the projected fiscal deficit, as that will lead to higher-than-expected growth in the medium-term, says a report.
"A marginal fiscal slippage from the current stage to increase capital expenditure should not be viewed adversely as accelerating growth is equally important," India Ratings said in a report on Thursday.
The agency further said "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."
By massively curbing planned expenditure, the government managed to bring down fiscal deficit to 3.99 percent from the targeted 4.1 percent in FY15 and has set a 3.9 percent fiscal deficit target for the current fiscal.
The agency notes that fiscal deficit for the first two months of the current fiscal at 37.5 percent of the full year target is a result of the government channelising higher spending towards capex to increase productivity.
"Higher planned expenditure indicates rising public investments in developmental projects. Evidence shows that such government expenditure also triggers private investment," the report said.
Accordingly, the agency said "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".
As per the report, private investment and bank lending remained weak but government spending had picked up. It noted, among others, that the ratio of projects under implementation, which are stalled projects, declined to 4 percent in March, 2015 from 5 percent in June, 2013.
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