No cuts in capital expenditure in FY23, says Somanathan

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No cuts in capital expenditure in FY23, says Somanathan

The government won't cut capital expenditure in the current fiscal year, according to finance secretary TV Somanathan, who said that fiscal policy should aid monetary policy in managing inflation. He said that capital investment is needed for the long-term growth of the economy and short-term developments should not distract from that goal. The government has budgeted 7.5 lakh crore capital expenditure in FY 23 compared to a revised 6.03 lakh crore capex in FY 22. The committed capex will continue, Somanathan said. In a surprise move by the Reserve Bank of India RBI earlier this month, the repo rate was raised by 0.4 percentage point to 4.4%, to tame runaway inflation that hit an eight-year high of 7.79% in April. The Centre has budgeted a deficit of 6.8% of GDP in FY 23 but with food and fertiliser subsidies likely to be higher owing to the Ukraine conflict, the fiscal deficit may exceed the target. If we reduce capex in view of the short-term issues, we will hurt the long-term growth. There will be no budgetary constraints on capital spending, according to Somanathan, which will affect committed projects in multiple sectors, such as roads, railways and roads. Other sources in the government said that while capex may not be cut, fiscal policy will in general support the RBI in managing inflation. There could be a redeployment of revenue expenditure, which will ensure spending does not rise sharply and undermine the RBI's monetary policy, said an official who said there was no sharp expenditure cuts as did earlier as revenues were comfortable. The situation is not a bad one, the official said. There could be a cut in revenue expenditure but not with the same intensity. There is a debate about fuel tax cuts among policy makers, officials said. They may cool retail prices in the short run but increase demand elsewhere, swell borrowing and run counter to the RBI's efforts to push down demand and cool inflation with monetary tightening. A final call on any tax cut will be made after considering all views at the highest level. The central bank seems to favor a reduction in taxes on fuels. Central and state taxes will likely surpass any rise in subsidy costs because of the Ukraine crisis, giving them space to cut taxes on fuels. The monetary policy committee of the RBI noted in the minutes of the last review released on Wednesday that countercyclical fuel taxes are necessary to prevent a ratchet effect on inflation.