We have been concentrating too much upon fiscal deficit as a measure of fiscal prudence. In a country like India, which has huge infrastructure shortages, that is not the appropriate measure, because there is nothing wrong with a country like India running relatively high fiscal deficits provided those funds go into creating infrastructures, which is actually de-bottlenecking the economy and enabling higher economic activity. That itself leads to reduction in inflation. Talking about 4.1 per cent or 4.5 per cent fiscal deficit is neither here nor there.
What has been happening is that with the need to reduce the fiscal deficit—partly because of inflationary pressures and partly because of pressures due to balance of payments which has a very high current account deficit—public investments are the easiest to cut. However, public consumption is relatively difficult as things like subsidies have a very high political resonance. So reviving public investments is essentially, in a sense, re-engineering the budget.
Of course, public sector funding in infrastructure is essential. A lot of infrastructure development results in the private sector going into the production mode, which automatically takes care of the problem to a large extent. As far as social sector expenditures are concerned, some of them are committed expenditure and you cannot do very much about it. But there are others where you can. There are a lot of social interventions where the leakages tend to be very large. Efforts to plug them can lead to substantial savings of funds without any adverse effect on social protection.
See, a large part of the slowdown was due to the corporate sector financially withdrawing from investments. However, the MSMEs have been investing and have been doing okay. The total level of investment has come down to 32 per cent of GDP from the earlier level of 39 per cent. While the MSMEs have increased their investments a bit, the corporates have seen a huge decline in their investments, and public investments have gone down. Now, the MSME investments are not expected to go up dramatically. So we really need to depend on public investments and revive corporate investments.
There are a number of reasons why corporate investments are down. The single-largest reason is the high level of uncertainty in terms of decision-making, and uncertainty in terms of the continuity of the last government. Since corporate investments tend to be large amounts of money being committed, they are just waiting to see a revival of decision-making in government and get a stable government. I think both have happened, so you may well see corporate investments come back. As far as the corporates are concerned, there is not as much of an issue with regard to funds. For most corporates the bottomline has not been bad, so they have a lot of cash balance. Most of them have access to the global capital market. So financing shouldn’t be as much of an issue. The question is, when do they get their confidence back? My hunch is that it is already back. I think already a lot of movement has begun.
As for balancing inflationary pressure and need for growth, they both have to be tackled together. If you don’t tackle inflation head on, then additional growth can add to inflationary pressure. So, both have to go hand in hand. Which means, you need to have one set of policies to tackle inflationary pressures, and another set of policies aimed at reviving growth.
Infrastructure is not a monolithic entity. There are all kinds of infrastructure. Take a high-speed elevated highway, which is a road. But the effect of such infrastructure on inclusive growth will be different from spending the same amount on creating more and better rural roads. So the type of infrastructure you are creating and the people who are going to benefit are questions that have to be asked. In a poor country you cannot shut your eyes to the need for welfare. That is not possible and should not happen.
Pronab Sen is currently chairman, National Statistical Commission
