Indian-born economist Arvind Panagariya, who is widely expected to take a top advisory role in Prime Minister-elect Narendra Modi’s government, wants its first Budget to boost capital spending even at the risk of a higher fiscal deficit. Panagariya, 61, whose market-friendly, pro-growth economics has helped shape Modi’s outlook, told Reuters in an interview that higher spending is critical to India’s economic revival. Modi swept to power on May 16 on a promise of reviving an economy that is undergoing the worst slowdown since the 1980s. Financial markets are rallying on hopes that the strong mandate would enable him deliver on his promise. “In an economy where you are trying to push up the growth rate, a fiscal deficit of 4.5 percent (of GDP) is fine,” said Panagariya, a professor at Columbia University and a former chief economist of the Asian Development Bank. That number is 4 basis points higher than the 4.1 percent budgeted by the outgoing government for the fiscal year that began in April, which Panagariya called an “unrealistic” target. Panagariya’s suggestion is at odds with a proposal being worked on by bureaucrats at the finance ministry who want the new government to reduce the deficit even further than the current target - to as low as 3.8 percent of GDP. Panagariya asked the incoming administration not to be unduly worried about a small fiscal slippage and suggested it use the room to boost infrastructure spending. “I would say raise capital expenditure from 1.76 per cent (of GDP) to 2 per cent,” he said. His prescription is in line with election promises of Modi’s Bharatiya Janata Party to ramp up spending on infrastructure to support growth.
