Tightening government spending in the January-March 2014 period to meet Budget projections will add to the headwinds to growth, according to the Reserve Bank of India.
The headwinds, which are continuing to hinder growth, are: weakness in industrial activity persisting into the October-December 2013 quarter, lacklustre lead indicators of services and subdued domestic consumption demand.
India’s fiscal deficit touched Rs 4.58-lakh crore during April-October, or 84.4 per cent of the full-year target. Finance Minister P. Chidambaram has said he is committed to narrow the fiscal deficit to 4.8 per cent of gross domestic product (GDP) this fiscal from 4.9 per cent a year ago.
The RBI acknowledged the fact that government has started putting in place certain correctives, such as austerity measures, including a mandatory 10 per cent cut in non-Plan expenditure, excluding certain identified expenditures.
The Government has also been making efforts to improve tax compliance through a combination of administrative steps as well as incentives, such as the Service Tax Voluntary Compliance Encouragement Scheme. More such measures are needed to avert fiscal slippage.
“Fiscal multipliers for capital outlay are found to be significantly higher than that for revenue expenditure. Hence, fiscal consolidation with a reorientation in expenditure from revenue expenditure to investment spending could be growth supportive as it will also crowd in private investment,” said the RBI document.