Cutting expenses on plan fund a bad strategy, say economists

Desperate to manage its floundering finances, the government has  resorted to cutting spends on plan expenditure or asset creation fund this year, a move which has been criticised by the economists as a strategy yielding bad economics in the long run.

 According to the latest government data, the plan expenditure in the ten months (Apr-Jan) to this fiscal year (2011-12)  has been only 66.6 per cent of the budgeted  Rs 4,41,547 crore. The same plan expenditure last year during the same period was over 73 per cent.

Economists are of the view that cutting plan expenditure will mean the government is further suppressing investments in the country, which is already on the low ebb as evident from the lower industrial expansion data.

“Cutting plan expenditure to finance deficit will definitely not have any result in the long run, but the problem with the government is that they are announcing schemes with increased subsidy which they cannot really afford,” eminent economist Mahesh C Purohit said.

He said the long term impact of curbing plan expenditure will effect growth prospects and increase inflation.

On the other hand if asset formation keeps pace, it will improve economic growth, which in the long term will have a positive impact on the fiscal deficit, he said.

According to a Crisil economist, the fiscal deficit can also be pruned by reducing non-plan expenditure and downsizing. Mahesh feels that some long pending reforms in industry and farm sectors are needed instead of extending subsidies endlessly. Non-Plan expenditure refers to all spending on defence, subsidies, salaries and interest payments.

Rising subsidy bill and slowdown in revenue flows have increased strain on government finances and raised doubts over meeting its fiscal target this year.

 Analysts see a large fiscal slippage and widening the deficit to as high 6.2 per cent of GDP but finance ministry is trying to keep it near 5 per cent by resorting to various such methods.

Government has also resorted to share buy back by cash-rich public sector units to meet its part of its Rs 40,000 crore disinvestment target this year. It has so far garnered only Rs 13912 crore in its divestment kitty, including from the latest auction of its 5 per cent shares in Oil and Natural Gas Corporation.