The Finance Minister understandably needs higher growth for revenue buoyancy to meet rising expectations and keep India fiscally prudent to earn laurels abroad. Fiscal consolidation recorded in 2004-08 was revenue-driven when GDP-Tax ratio also kept rising to 12 per cent on 2007-08. The 2010-11 budget, which is impacted by the additional devolution of share in central taxes and larger grants to states, as recommended by the 13th Finance Commission, may not be faulted for its strategy aimed at raising growth above the 7-8 per cent range and providing for incremental allocations under “inclusive development”.

Like agriculture, inflation control or securing the intended outcomes of allocations and getting the benefits reach the targeted population, Government seems to be on a continuous learning curve, admitting there is a “long way“ to go and results could come only over the long haul. Whatever the level of performance, involving both the Centre and the States, public expenditures have to become demonstrably effective. Mr. Mukherjee may have signalled that the process of fiscal consolidation is back on track by projecting fiscal deficit at 5.5 per cent of GDP, below the 6.7 per cent in the current year, but it may prove unrealistic if not supported by pending oil pricing reforms and some effective subsidy reductions, especially in fertilisers.

Yet, these are the very issues on which resistance is being mounted by not only the opposition parties but also partners in ruling alliance (UPA) - Trinamool Congress and DMK, both clearly keeping their eyes on next year's assembly elections in West Bengal and Tamil Nadu. The Prime Minister has ruled out any rollback of increases in petroleum product prices which followed the restoration in the budget of import duty on these products. The BJP-led opposition, joined by the Left, is determined to make the passage of the budget difficult in an unprecedented fashion. There are stormy days ahead in Parliament.

In framing the budget proposals, the Finance Minister had to ensure some consistency with the two major tax reforms on the anvil — Direct Tax Code and GST (Goods and Services ax) to be introduced from April 1, 2011. The widely-held assumption is that as these reforms get under way, there would be robust growth in tax revenues in the coming years. In this perspective, both as part of a calibrated exit from counter-cyclical policies of the last two years and bringing about some unification in the Cenvat, Mr. Mukherjee has managed to raise Rs.46,500 crores from indirect taxes, which are generally considered regressive and bear heavily on the poor.

Apart from the double-digit rise (16.23 per cent) in primary commodities (driven largely by the highest ever food prices), the fuel group index had also risen to 9.89 per cent by mid-February while prices of manufactured products have also been hardening. Already RBI and Economic Survey have warned of the possibility of food, fuel and other price surge getting transmitted to the general price levels in the coming months, unless Government moves fast with counter-measures. WPI itself had risen to 8.56 per cent in January 2010. In several manufactures, post-budget increases are expected, both basic and consumer goods. Steel and Cement are among major industries indicating price revisions, generating overall higher inflationary expectations. All that the Finance Minister had to say on prices, as if it was a latter day phenomenon, was that steps set in motion in consultation with state chief ministers “should bring down inflation in the next few months”.

The countrywide agitation against high food prices would get reinforced by the new excise levies and the rise in petrol/diesel prices.

To revert to the budget deficit projections, the Finance Minister has taken into account increases in tax and non-tax revenue of the order of around 100,000 crores inclusive of disinvestment proceeds (Rs.40,000 crores) and 3G auction realisations of the order of Rs.35,000 crores along with improved revenue collections, mainly under corporate and indirect taxes. Undoubtedly, the 13th Finance Commission recommendations which Government has accepted raise the share of states of central taxes to 32 per cent as also the grants-in-aid, These would pose a heavy burden on the Centre over the coming five years. Nevertheless, Government has set its deficit targets in line with the road map suggested by the Commission.

The Finance Minister announced that fiscal deficit would be further lowered from 5.5 per cent of GDP in 2010-11 to 4.8 per cent and 4.1 per cent in the following two years. The Commission's road map envisaged fiscal deficit reduction from its estimate of 5.7 per cent in 2010-11 to 3 per cent by 2013-14 along with elimination of revenue deficit and capping the combined debt of Centre and states at 68 per cent of GDP to be achieved by 2014-15. Mr. Mukherjee said Government would, for the first time, target an explicit reduction in domestic-debt-GDP ratio, a lined also suggested by IMF.

All this will be premised on the Indian economy getting back to its pre-crisis high growth trajectory.

For the next two years, the budget assumes sustained growth at 8.5 and 9 per cent respectively. The projections on revenues and expenditures, deficits, tax-GDP ratio and debt levels are all on the basis of sustained robust growth of the economy. The projections would get affected by “unforeseen expenditure and further shocks in international commodity prices”, according to Budget documents.

For the world economy as a whole, a slow recovery is forecast as advanced nations struggle to grow and provide jobs and rebuild their broken finances. Only by mid-2010, the country would know whether it would have a normal monsoon so that economic recovery gets strengthened to fulfill the assumptions underlying the Budget. The Finance Minister included a prayer to Lord Indra in his speech. (IPA Service)