The government's efforts to narrow fiscal deficit since last two years by expenditure cuts has resulted in lower productive spending, and the new government would find it challenging to give it a boost, says a report.
A reduced fiscal deficit-to-GDP ratio in FY14, for the second year in a row, has come at the cost of lower productive spending. In his interim budget, Union Finance Minister P Chidambaram had said that the FY14 fiscal deficit would be at 4.6 per cent, below the red line of 4.8 per cent he had set in the beginning of the year.
In FY13, fiscal deficit was contained at 5.2 per cent as against 5.3 per cent.
"The cost of this compromise will be felt in the years to come since the government's productive spending has a multiplier impact on the economy in subsequent years," Crisil said in a report.
"The new government that will take charge next month must aim to reverse this trend and raise the government's productive spending," the report said.
The 13th Finance Commission had last year set a capital expenditure-to-GDP target of 4.5 per cent by FY15.
However, the report said the ratio for FY14 was 1.7 per cent and the same is budgeted for FY15.
"Even if revenue grants provided by the government for capital creation to the states are added to the Centre's capital expenditure, the government's total budgeted spending for productive purposes will only be 2.8 per cent in FY15," the rating agency said.
In the last two years, productive spending which is capital expenditure and the revenue grants for capital creation in critical areas such as public infrastructure, education and health care, among others, has been lower than budgeted by nearly Rs 1.8 trillion.
In terms of per person spending, the government only spent an incremental Rs 110 on productive spending, while it spent an additional over Rs 1,900 per person on other expenditure over the last two financial years, the Crisil report said.
It said the government could limit fiscal deficit within the target, either by raising revenues or by cutting spending.
The report said while large part of the current expenditure is sticky - salaries, pensions, and interest payments - cutting unproductive spending on subsidies, mainly on fuels such as kerosene and liquefied petroleum gas, would be necessary.
"This will have to be supplemented through tax reforms such as GST, which will improve the government's revenue position and fund higher capital spending. Therein lies the challenge for the next government," the Crisil report added.