Budget 2006: outlays, inequality and growth

Abstract

The fiscal deficit is being contained by a decrease in interest payments and capital expenditures, along with a secular rise in direct taxes. However, the reduction in capital expenditures, mainly in infrastructure, is growth constraining. This article argues that infrastructure expenditures have a propensity to increase inequality and this turns the attention of government towards redistribution, which, in turn, increases transfer payments and squeezes out capital expenditures. Sorting out governance issues associated with infrastructure spending is essential to making budgetary finances more growth-oriented.