Modi speeds up capital spending in April to push growth

By Reuters

May 30, 2015 06:15 AM EDT

Prime Minister Modi ramped up spending on roads, railways and rural infrastructure in April to boost economic growth, after $19 billion in cuts brought public investment shuddering to a halt at the end of the last fiscal year.

Modi, who completed one year in power this week, has vowed to raise public spending on infrastructure by $11 billion in the current fiscal year. At the same time, he is targeting a fiscal deficit of 3.9 percent of gross domestic product, a shade lower than 4 percent achieved in the year that ended in March.

The government increased capital spending to 351.6 billion rupees in April, the first month of fiscal 2015/16. That is up more than 50 percent from a year ago, data released by the government on Friday showed.

In the first month of the current fiscal year, the government allocated 32.89 billion rupees for railways, 58.3 billion rupees for roads and 175 billion rupees for rural projects.

Data released earlier on Friday showed the Indian economy grew 7.5 percent in the quarter ended in March, faster than China. But a contraction in agriculture and a downward revision for the previous quarter indicated weaknesses in Asia's third- largest economy.

With banks weighed down by bad loans, company profits squeezed, rural demand weak and exports depressed, the government recognises it will have to take the lead to meet its jobs and growth goals.

"Front-loading of spending on infrastructure is a welcome step, though it remains to be seen what happens in the whole year," said N.R. Bhanumurthy, an economist at the National Institute of Public Finance and Policy (NIPFP), a Delhi-based think tank.

Fiscal deficit figures for the first month of the new fiscal year indicated that Modi's government plans to support domestic demand. Finance Minister Arun Jaitley plans to boost public investment in infrastructure and devolve more spending powers from the centre to India's 29 states.

He has abandoned costly diesel subsidies, helped by lower global crude prices, and promised to reduce corporate tax rates to 25 percent in the next four years, besides cutting rates for individual tax payers.

Officials at the finance ministry, however, warned capital spending might be cut in later months if revenue collection does not pick up.

It is also not clear whether the government will reach its target of nearly 700 billion rupees from sales of stakes in state-run companies this fiscal year, a senior finance ministry official said before the release of the data.

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