Indian-born economist Arvind Panagariya, who is widely expected to take a top advisory role in prime minister-elect Narendra Modi's government, wants its first budget to boost capital spending even at the risk of a higher fiscal deficit.
Panagariya, 61, whose market-friendly, pro-growth economics has helped shape Modi's outlook, told Reuters in an interview that higher spending is critical to India's economic revival.
Modi swept to power on May 16 on a promise of reviving an economy that is undergoing the worst slowdown since the 1980s. Indian financial markets are rallying on hopes that the strong mandate would enable him deliver on his promise.
"In an economy where you are trying to push up the growth rate, a fiscal deficit of 4.5 percent (of GDP) is fine," said Panagariya, a professor at Columbia University and a former chief economist of the Asian Development Bank.
That number is 4 basis points higher than the 4.1 percent budgeted by the outgoing government for the fiscal year that began in April, which Panagariya called an "unrealistic" target.
Modi is due to be inaugurated as prime minister on Monday. His government has to present a budget by July for the remaining part of the fiscal year that ends in March.
Panagariya's suggestion is at odds with a proposal being worked on by bureaucrats at the finance ministry who want the new government to reduce the deficit even further than the current target - to as low as 3.8 percent of GDP.
Panagariya asked the incoming administration 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 percent (of GDP) to 2 percent," he said.
His prescription is in line with election promises of Modi's Bharatiya Janata Party (BJP) to ramp up spending on infrastructure to support growth. Arun Shourie, a contender for the post of finance minister in Modi's cabinet, told CNBC television on Friday that he also thought a 4.1 percent deficit was impossible.
However, a higher deficit could increase the risk of a sovereign credit downgrade. Since April 2012, India has been facing a downgrade threat from Standard & Poor's, which rates it at BBB minus with a negative outlook.
RETROSPECTIVE TAX LAW, BANKING REFORMS
Insiders close to Modi have suggested that Panagariya could be appointed the prime minister's chief economist. His mentor, Jagdish Bhagwati, told Reuters last month that Panagariya could head the team of the