Given the growing optimism about demand and investment outlook, the Budget is likely to assume not less than 8 per cent growth in 2010-11. The Finance Minister is already committed to bringing down the fiscal deficit from the projected 6.8 per cent in the current year to 5.5 per cent in 2010-11 and to 4.4 per cent in the next year, and conditions seem favourable for him to launch the fiscal adjustment strategy.

With the base year revised to 2004-05, the budgeted deficit of 6.8 per cent may be down to 6.4 per cent as ratio of GDP, though the deficit in absolute term may not be lower.

Recovery from the global crisis which negatively impacted emerging economies was to a large extent helped by the fiscal stimulus, as a short-term response, though it enlarged the budget deficit. The tone for macro-economic policy for the new year has already been set by the Reserve Bank by its calibrated exit from the accommodative monetary stance, which has been commended by IMF in its latest survey on India.

While noting India's “rapid recovery” as one of the first countries to overcome the crisis, bringing its growth close toward pre-crisis levels, IMF has recommended withdrawal of fiscal accommodation as, in its view, it has pushed deficit into double-digit with the debt-GDP ratio back at 80 per cent. Leading indicators suggest that the output gap will continue to close in the coming months. Capital flows have risen so far. Business chambers would like stimulus to remain for the recovery to become stronger but deficits are so large that for Mr Mukherjee, fiscal correction should begin now, in line with IMF expectations.

As against the Government and RBI estimates of 7 to 7.5 per cent for the current year, IMF's projections are for GDP to rise from 6.7 per cent in 2009-10 to 8 per cent in 2010-11. Welcoming the Government's stated intention to lower the deficit from the forthcoming budget, IMF's executive directors suggested a concrete strategy being laid out for reducing debt through durable reforms, which would “boost credibility and foster growth”. Most Directors considered that anchoring India's medium-term fiscal framework with a debt target would be helpful.

This should become a turning point for the 2010-11 Budget, which would also incorporate the 13th Finance Commission's scheme of devolution of Centre's tax revenues to states for the five year period (2010-15). The Commission's recommendations with Government decisions thereon would be laid on the table of Parliament a day prior to the Budget presentation. The needed fiscal adjustment over the medium-term would have been taken care of by the 13th Finance Commission headed by Dr Vijay Kelkar, who has also recently argued in public for a substantial thrust in disinvestment, even privatisation in sectors like aviation, for greater efficiency besides mobilisation of resources for social spending.

Since the Direct Tax Code and the Goods and Service Tax, which will be at two levels for the Centre and the States, to be unified at 12 per cent as national average, will not form part of this budget, the Finance Minister will have to secure additional resources mainly from disinvestment and the 3G Spectrum auction which together could help lower the deficit by about one percentage point in the coming year. The Finance Minister has some fiscal space as there is no new commitment like the farmers' debt waiver earlier.

While Government would continue to maintain the import tariff at 10 per cent in order to give a measure of protection to domestic industry, the modifications in excise and service taxes, as stimulus is withdrawn gradually, would make for some addition to revenues. The Direct Taxes Code providing for higher personal tax exemptions and corporate tax rate reduction are to be brought into force from April 1, 2011. Meanwhile, the veteran Treasury chief would manage to present a dexterous exercise to make it appear both growth-friendly (for the elite), advancing perhaps an enhanced exemption limit, and “pro-aam admi” with stepped-up social spending.

Fiscal adjustment in the high growth phase ending 2007-08 was based on revenue buoyancy but there is now greater focus needed on expenditure reform. The usual refrain is to cut down non-development spending. IMF has again urged for phasing out “regressive” subsidies and introduction of market-based pricing for petroleum products, which is what the Kirit Parikh Committee has suggested in its report awaiting some bold decision on the part of Government.

While Mr Mukherjee can be expected to sound credible on expenditure reform, he would also make an effort toward subsidy reductions, both on oil products and fertilisers. He is to announce the new system of fertiliser subsidy which would be more nutrient-based and directly transferred to farmers. On oil products, IMF says subsidies on products consumed predominantly by the poor should be replaced with targeted support.

Certain increase in prices of petroleum products are inevitable to make up for the ongoing losses incurred by the oil marketing companies by selling prices below market levels. This has to be done to reduce the outgo by way of oil subsidy though the timing of price revisions would have to be carefully chosen, given the present inflationary situation triggered by double-digit food prices. Without such a revision and phasing down of administered pricing mechanism, Government cannot effectively begin to reduce fiscal deficits. This is all the more so since hopefully the budget would discontinue the practice of treating issue of oil bonds to marketing companies to cover a major part of their losses, as an off-budget liability.

Budgets even with some fiscal discipline are intrinsically expansionary and the proclaimed objective of price stability is normally sought to be achieved through a mix of monetary and administrative measures, not excluding some duty reductions when inflation exceeds tolerable levels. In this year, there is an extraordinary situation when for the best part of the year, Government has remained clueless on ways to bring down the high food product prices (around 18 per cent) in the face of mounting political and media pressures for authority to act. After a year of food price inflation devastating middle class budgets, there is now some stirring at the highest levels of UPA Government, away from inter-ministerial wrangles. The Prime Minister has acknowledged that there has been a “false sense of security” on the food front. This would need both immediate measures and medium-term strategy to raise farm productivity, which suffered in the quest for high growth through non-farm sectors.(IPA Service)