Infrastructure-focused fiscal stimulus will be key to India’s recovery: EY

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August 27, 2020 6:21 PM

EY estimates that fiscal space up to 1 per cent of GDP may be released by reduction of revenue expenditure which can be used to augment capital expenditure while keeping the total expenditure at the same level as budgeted for FY21.

EY said it has made a series of immediate and medium-term recommendations on policy and fiscal measures to finance the infrastructure spending of government. (Reuters file image)

Even as economic activities have slowly picked up pace with relaxation in lockdown norms, infrastructure-focused fiscal stimulus will be key to India’s recovery, according to consultancy firm EY. To give further impetus to recovery, Prime Minister Narendra Modi during his Independence Day address stated that the Centre will spend over Rs 110 lakh crore on about 7,000 projects of different sectors under the National Infrastructure Pipeline (NIP), EY said in a statement.

Sudhir Kapadia, National Tax Leader, EY, said, “The Government of India had already embarked upon significant monetary and fiscal stimuli from March 2020. Now with the right policies, regulation, collaboration and investment, we can clear the obstacles to economic advancement.”

“Furthermore, to rejuvenate India’s growth, Centre’s capital expenditure will play an important role in creating positive effects on employment, GDP growth and other government priorities such as manufacturing, green energy, among others,” he added.

EY said it has made a series of immediate and medium-term recommendations on policy and fiscal measures to finance the infrastructure spending of government, which includes public sector borrowing (Centre and states) of 15 per cent of GDP in FY21 to ensure NIP financing for the year. It has also recommended increasing Centre’s fiscal deficit for FY21 to 7 per cent of GDP.

As per RBI’s revised borrowing programme, fiscal deficit is estimated at 5.6 per cent of the GDP, it said, adding that additional 1.4 per cent (Rs 3 lakh crore) can be financed through deficit monetisation or borrowing from abroad at substantially low interest rates and spent on capex for infrastructure.

“As per official data on the cumulated revenue collections under road and infrastructure cess and health and education cess, of the total collections from these cesses, there is a short transfer of about Rs 2 lakh crore (0.9 per cent of the estimated FY21 nominal GDP) to the specified designated funds.

These amounts should be available in the Consolidated Fund of India,” the consultancy firm said. Both put together will provide resources up to Rs 5 lakh crore for potential infrastructure investment in the next few months, it added.
“Additional fiscal space can be made available through expenditure restructuring. EY estimates that fiscal space up to 1 per cent of GDP may be released by reduction of revenue expenditure which can be used to augment capital expenditure while keeping the total expenditure at the same level as budgeted for FY21,” it said.

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