June 30, 2008
Abstract: Usually, business-cycle fluctuations do not affect the long-term performance of the economy. However, certain kinds of policy responses to cyclical movements can influence long-term prospects. Staying on a sustainable high-growth path requires massive investments in infrastructure. While government incentives have attracted significant private investments, the government’s role continues to be paramount and this is where the problem arises. Currently, the government is controlling inflationary spikes in consumer prices, using oil and fertilizer bonds which are putting pressure on its fiscal deficit. In such situations, the Government typically responds by cutting back on capital expenditures, including infrastructure in view of its commitment to fiscal deficit targets under the Fiscal Responsibility and Budget Management (FRBM) Act. If this past pattern continues, India’s long-term performance will be negatively affected.
Keywords: Business-cycle fluctuations; fiscal deficit; infrastructure; FRBM Act