Former Finance Minister P Chidambaram on Tuesday wondered whether the Narendra Modi -led government would move on the path of fiscal consolidation or allow the fiscal deficit to rise.
"Will the government follow the Kelkar recommended path and affirm the Budget estimate fiscal deficit of 4.1 per cent for 2014-15? Or will the government take the advice of Arvind Panagariya (wrong advice in my view) and allow the fiscal deficit to rise? This is the million dollar question," he told PTI.
Indian-born Panagariya wants the Modi government's first budget to boost capital spending even at the risk of a higher fiscal deficit. Mr Panagariya, 61, whose market-friendly, pro-growth economics has helped shape Mr Modi's outlook, told Reuters in an interview last week that higher spending is critical to India's economic revival.
Mr 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 Mr 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 per cent budgeted by the outgoing government for the fiscal year that began in April, which Panagariya called an "unrealistic" target.
Mr 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.
However, a higher deficit could increase the risk of a sovereign credit downgrade. Since April 2012, India has been facing a downgrade threat from Standard & Poor's, which rates it at BBB minus with a negative outlook.
(With inputs from agencies)
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