There is no doubt that government expenditure in selective sectors is the most effective way to counter the present recessionary tendencies. The US is the role model in this type of fiscal action for the present day Emerging Market Economies. The US government in the 1930s as part of the New Deal has made huge investment in its infrastructure sector to overcome the slump. Indeed, this is the right opportunity for EMEs to carryout their development expenditures.
Of the available fiscal options to stimulate the economy, public expenditure is definitely superior to tax cuts. This is because increase increase in public expenditure by the government directly increases effective demand. On the other hand, in the case of tax cuts, it is not certain that tax cuts and the resultant increased income create additional investment or consumption demand.
For every Emerging market Economy, infrastructure is the most suitable sector to make fiscal stimulus expenditure. The Chinese government has declared around $500 bn plus stimulus package to counter the slow down. Most of this investment is proposed in the infrastructure sector including rural housing, roads and electricity projects. The EMEs generally have an infrastructure gap and hence the present slow down is the right occasion for the governments to put money in the sector especially due to the decline in the price of industrial raw materials.
In India, as per the Consultation Paper on the Projections of Investment in Infrastructure during the 11th Plan (2007-2012), the total investment required for the infrastructure sector (at 2006-07 prices) will be of the order of over Rs. 20,18,700 crore (USD 492 billion. Over the years, the government has developed BOT, BOOT, and BOLT models for attracting private investment on PPP basis.
Now, in the wake of the slow down, the government’s responsibility to promote infrastructure creation has increased at a time when the private sector is facing paucity of funds. But still, institutional limitations in delivering fiscal stimulus are big in India, compared to China where there is autocratic government machinery.
The government has already made many expenditure oriented stimulation measures. An important part of the fiscal stimulus package was sanctioning the Indian Infrastructure Finance Company Limited (IIFCL) to procure Rs 30000 crore through tax free bonds. The IIFCL will carryout Rs 75000 crore worth of infrastructure projects in the next eighteen months.
The role of IIFCL in carrying out the government expenditure stimulus is big. Firstly, the IIFCL over the years has been evolved as the apex lending agency in the infrastructure sector. Secondly, it is a sovereign promoted institution; implies active government patronage. The IIFCL was incorporated on January 5, 2006, at a time when most of the DFIs like the IDBI, who provided development finance for decades, are extinct.
Already, the government has put a part of the RBI’s foreign exchange reserve to the IIFCL’s London subsidiary. IIFCL (UK) Ltd will provide foreign currency funds to Indian companies to set up various infrastructure projects in India.
The fiscal stimulus package of giving fund procurement support to the institution is an indicator of the government’s financial support to the sector. In future, the IIFCL will perform a critical role in delivering the government’s fiscal incentives to the sector. Inevitably, the IFCL will get more funds and policy based encouragement from the government in the coming years in the initiative to arrest the slow down.