External environment still a threat to Indian economy: ASSOCHAM

Instead of waiting for the heavily burdened private sector to revive, the government should expand the rich public sector and start new projects to boost demand, says the Association

By Sai Nikesh D

Expenditure cuts could be detrimental to the Indian economy which is still exposed to the slowdown in global markets, the Associated Chamber of Commerce & Industry of India (ASSOCHAM) has said following reports that the government may to slash its planned expenditure to meet the fiscal deficit target in FY2014-15.

Urging the government to focus on the economic revival and get out of the idea of squeezing the States’ planned expenditure budget, ASSOCHAM said that the risks to the Indian economy are mainly from the overseas situation which has so far helped in terms of low crude oil prices. However, the negative impact of the slow recovery in key EU and American markets is expected to reflect on merchandise exports, IT exports and the impact on the rupee in coming months, the chamber said.

In the Mid-Year Economic Analysis (MYEA) FY2014-15, the Ministry of Finance revealed last month that the Government is firmly committed to meeting its fiscal deficit target of 4.1% of GDP in FY2014-15, down from 4.5 % in the previous year.

According to Budget Estimates (BE) 2014-15, fiscal deficit is budgeted at Rs.5,31,177 crore for the full fiscal year, but the figure stood at around Rs.4,38,826 crore in the first six months of FY2014-15, sparking concerns over an increase in fiscal deficit this year.

However, ASSOCHAM says that expenditure cuts will prove to be counter-productive. “Heavens would not fall if the fiscal target of 4.1% in the current fiscal year is not met and the deficit moves up somewhat. But it will be quite detrimental to the efforts for economic revival if different ministries are asked to squeeze their planned budget and such  saving saves the day for the fiscal consolidation,” ASSOCHAM said.

It added that the private sector is unlikely to revive soon as the existing capacity remains unutilised to the extent of 30-40% in several industries, and it is finding it difficult to service the debt under an interest rate regime which remains hostile to consumer demand and investors’ risk appetite.

“Under these circumstances, the only way left for investment to return is through state funding of the infrastructure – both economic and social as also asking the cash rich public sector companies to create additional capacity and expansion either through new projects or through asset acquisitions. The public spending on infrastructure has to increase rather than decrease, as there are apprehensions about the same,” D.S. Rawat, Secretary General, ASSOCHAM said.

This article was published in The Dollar Business on January 12, 2015.

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