The Hindu Business Line : Govt spending alone can’t sustain recovery: Economists

Thiruvananthapuram, July 1 The Government’s capability to continue to cushion growth would be uppermost in the Finance Minister’s mind as he sets about giving the finishing touches to the Union Budget, say economists.

A sharp increase in Government spending is clearly behind the nascent signs of resilience visible in the Indian economy, said Dr Dharmakirti Joshi, Director and Principal Economist at rating agency Crisil.

Without a turnaround in the advanced economies, a decisive upturn in the Indian economy is not feasible.

High deficits not only divert resources away from developmental goals but also crowd out private investment and create difficulties in the implementation of monetary policy.

‘Crowding out’ will begin to pinch when economy recovery gains momentum. The high deficits have already pushed the bond yields up, thereby muting the impact of rate cuts authored by the Reserve Bank of India.

The Government can resort to divestment of stake in public sector undertakings and mobilise additional resources through 3G spectrum auction, but this will only provide temporary relief.

“It should come out with a new Fiscal Responsibility and Budget Management (FRBM) Act and launch expenditure reforms,” Dr Joshi told Business Line.

A stable political mandate and only the first year of governance make it the best possible time for launching these and other pending reforms.

Echoing similar sentiments, Mr Ananda Bhoumik, Senior Director at Fitch Ratings, observed that the Government has been the largest consumer over the past six months or so.

The moot question would be whether it would remain so and sustain the GDP growth. But this would, in turn, throw up the larger issue of managing the fisc whose health is under severe stress.

The Finance Minister would be hard-pressed striking a correct balance between these two mutually repulsive demands.

Viewed from a bank’s standpoint, Mr Bhoumik said that any large-scale borrowing programme by the Government would be closely watched for crucial implications on interest rates and bond market behaviour.

Another major issue for the Finance Minister to deal with is fresh infusion of capital in banks in view of the likely high loan growth rate expected during the rest of the financial year.