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Higher tax mop-up makes finanace ministry seek spending hike; to use it for roads, shipping, agricultural
June, 15th 2015

Buoyed by higher tax collections, the finance ministry has loosened the purse strings and asked ministries and departments to start spending as it looks to lift growth with private sector investment yet to get underway. The rider is that the focus should be on capital expenditure.

A pickup in indirect tax revenue, which grew 39.2% in April-May, has provided elbow room that the ministry is keen to use. "We have asked ministries to front load expenditure," a finance ministry official told ET. The key areas are roads and shipping along with rural development and agriculture. In the absence of any other stimulus and the Reserve Bank of India's conservative stance, the finance ministry is of the view that a spending boost is necessary.

The RBI has since January cut the repo rate by 75 basis points and is regarded by its critics as being behind the curve, especially in relation to counterparts in Asia that have opted for aggressive cuts to boost growth. The government has been quick to get off the starting blocks with April spending at a twodecade high of 8.7% of the amount budgeted for the entire fiscal year. This pattern is set to continue. "Early spending can give the muchneeded impetus to growth," the official said. Total expenditure for FY16 is pegged at Rs 17.77 lakh crore. Government spending in the first month of the last financial year was 6.7% of the full-year amount. The past two financial years have seen a squeeze on spending, particularly plan expenditure, as revenue remained under pressure and the government could not allow any slippage on the fiscal consolidation front. Experts said increased public expenditure will provide a boost to the economy with private sector investment yet to kick in.

"Front loading of expenditure will lead to private sector soon following," said DK Pant, chief economist at India Rating. The road ministry is focusing on building highways through engineering, procurement and construction (EPC) contracts as it will take a while for the public private partnership model to pick up. Most private sector companies care under financial stress. A number of projects are expected to be awarded this month, mostly through the EPC route.

The government had changed the fiscal consolidation roadmap in the February budget by delaying the goal of containing the fiscal deficit at 3% of GDP by a year to FY18. The idea was to use the headroom created to boost capital expenditure and fund infrastructure projects. The fiscal deficit in FY16 is pegged at 3.9% of GDP and the government is confident that it will be able to meet this target comfortably. Rationalisation of fuel subsidies will provide some help.

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