Given how, in October, the fiscal deficit was already at 89.6% of full year’s target, chances are there will be a further compression in expenditure levels over the next quarter. A compression has already been seen, as happened in the last fiscal. So, while total expenditure rose 8.2% in Q1, this slowed to 5.1% in Q2, and contracted 11.4% in October on a year-on-year basis. Within this, capital expenditure contracted 8.7% in Q1, rose 15.6% in Q2, and then contracted 36.1% in October. In FY14, due to a R77,000 crore shortfall in gross tax revenues—R48,000 crore in the case of net revenues—capital expenditure for the year was cut by R40,000 crore, or 17% of the year’s target. Chances are a similar correction will take place in FY15. Capital expenses till October were R1,09,354 crore, or 52% short of the full year’s target. So, unless the finance minister is to find a new source of funds, he will have no option but to cut capital spending—FE has, of course, been advocating the sale of all SUUTI shareholdings, so that can easily net the finance minister R47,000 crore and can be used to keep capital expenditure at budgeted amounts.
Cutting capital expenditure would be unfortunate since, with corporate balance sheets in complete disarray, India Inc’s investment levels are going to remain poor for some time to come. From 17.3% of GDP in FY08, India Inc’s investments were down to a mere 9.2% in FY13. This cannot rise till there is the kind of slack there is right now in capacity utilisation; more important, until both corporate and bank balance sheets are cleaned up sufficiently, corporate capex can’t pick up sufficiently. In this situation, it is vital that government investment levels be kept up, if not raised further, since the only major player that has the capacity to invest right now is the government. If the money is spent on roads and irrigation, for instance, the payback can be relatively quick, and the impact on employment generation will also be very high—of course, if the government is not able to get the land reforms Act changed, much of this will come to naught.
What this really boils down to, then, is the issue of the fiscal deficit. It is important for the government to keep in mind that, apart from the pure deficit number itself which can be relaxed in the short-term, it is the quality of the deficit that matters—if the money is going to be spent on investments, investors are going to be far more tolerant of it as compared to a situation in which the money was spent on more wasteful subsidies. The government will also do well to deconstruct the deficit for investors—the deficit rising due to tax collections faring badly is quite different from an out-of-control deficit due to runaway expenses. Also, in a situation where the private sector is not really borrowing much, the issue of ‘crowding out’ of private sector fund raising—just look at the fall in bond rates—does not really arise.