This was not the first time that undue expectations on structural changes in the economy were raised, though the latest survey sounded bolder even as India was grappling with the impact of the global economic crisis, which will last into 2010. The budget, which followed the survey, thus proved no exception to the rule. Delving into details in the budget, the depth of the economic slowdown to be reversed and the massive fiscal gap becomes clearer.

UPA-I might have benefited from the global economic boom years with India moving into a trajectory of 9 per cent growth till 2007-08, a period of revenue buoyancy aiding fiscal consolidation toward FRBM targets. Now UPA-II is in search of ground lost, with growth down to 6.7 per cent in 2008/09 and erosion of fiscal space while non-plan expenditure assumed gargantuan proportions.

The three stimulus packages of 2008/09 might have helped to keep the growth at 6.7 per cent, as the Finance Ministry claims, but what the record Rs.10-lakh plus crore budget for the current year aims is also modest, 6.51 per cent growth in real terms or 10.05 per cent at current prices. Government is now forced to borrow to meet part of non-plan expenditure itself, let alone making productive use of borrowings.

The fiscal crunch that Government has to overcome is so formidable, and not amenable to correction in a matter of two to three years, that the Finance Minister could not have set a targeted return to bringing deficits to sustainable levels.

Indeed, the market and the critics of the budget, even as it was unfolding on July 6, vainly looked for road-maps for everything - disinvestment, fiscal correction, and reforms to open up the economy in financial and other sectors. Mr. Mukherjee, however, could have outlined some vision of the medium-term objectives of UPA-II for the economy and for deficit reduction including the role of disinvestment in this regard and blunted the criticisms. What the dexterous veteran, in a commendable performance, missed was some 'packaging' of his oration.

India's domestic finance is truly in a mess. This is evident the way the Finance Ministry has had to revise down its projections of medium-term fiscal outlook projected in the February interim budget. Tax-GDP ratio on the ascent from 10.2 per cent in 2005-06 to 12.6 per cent in 2007-08 was down to 11.6 per cent in 2008-09. It would go down further to 10.9 per cent in the current year before reversing hopefully to rise to 11.9 per cent and 12.4 per cent of GDP in 2010-11 and 2011-12 respectively.

This is contingent on the economy reviving at least in the latter part of this year so as to generate growth-led revenue with which the Finance Ministry hopes to lower revenue deficits from 4.8 per cent in 2009/10 (BE) to 3.0 and 1.5 per cent in the following two years and the fiscal deficit budgeted at 6.8 per cent this year to 5.5 and 4.0 per cent of GDP in these two years to come. Not only a strong revival of the economy would be essential to realise these targets but far-reaching expenditure reform would be equally imperative.

A major route to it is a substantial reduction in subsidies, especially in fertilisers and petroleum products through pricing and other strategies, such as indicated by Mr Mukherjee. The other obvious course is to raise more tax and non-tax resources. For the current year, he has kept the tax structure, direct and indirect, broadly untouched. This is not the year he could have done anything else except to provide more sops to boost domestic demand and salvage growth.

Those who had expected that disinvestment and other receipts would make a big dent in the deficit have been rudely disappointed, notwithstanding the sizeable increase expected under non-tax revenue from Rs.95,785 crores in 2008-09 (BE) to Rs.140,279 crores in 2009-10. It is an increase of over 44 per cent over the final estimate of non-tax revenue of 2008-09, taking into account anticipated receipts from telecommunication sector via auctions 3G spectrum plus higher dividend receipts from banks and Central public undertakings and transfer of surplus from RBI. More as a token, a little over Rs.1,000 crores is indicated for disinvestment.

Total budgeted expenditure at Rs,10,20,838 crores represents an increase of 36 per cent (plan 34 per cent and non-plan 37 per cent) over the previous year's actuals. This is due to higher plan outlay to boost demand and increased food subsidy. But most worrisome is the huge rise in non-plan expenditure to over Rs.618,834 crores on revenue account from Rs.561,790 crores in 2008/09 as per provisional accounts. That was an increase of Rs.110,000 crores over last year's budget estimate, accounted for by the sixth pay commission report, the farmer debt waiver scheme and rise in major subsidies.

Revenue growth in the current year is expected to be relatively low and the uptrend in non-plan expenditure is also to continue. While the total plan expenditure estimated at Rs. 325,149 crores would represent 81 per cent of the fiscal deficit (Rs.400,996 crores), the remaining 19 per cent of net borrowings would finance non-plan expenditure. Even these projections are subject to a revival of growth during the year to lay the basis for improved fiscal performance over the next two years. But there is considerable uncertainty about the global economy which made the Finance Minister say, “we are not out of the crisis yet”. And we link our higher growth with external trade and capital inflows.

The Finance Ministry says in its medium-term policy paper that it would be the endeavour not to use borrowings to finance non-plan revenue expenditure even if dependency on borrowing for financing development expenditure will continue in the medium term. Otherwise, it would not be possible to bring down the public debt-GDP ratio which would rise to 61.4 per cent in 2009-10 from 59.6 per cent last year and the projections, with all the planned reduction efforts, are for the ratios to go down to 60.1 and 57.2 per cent in 2010-11 and 2011-12 respectively.

Elimination of revenue deficit, which is central to fiscal deficit reduction to the sustainable 3 per cent of GDP, is a long way off. A roadmap is awaited from the 13th Finance Commission in October. The Commission's recommendations on devolution over the next five year 2010-15 would hopefully improve the revenue picture, linked to the introduction of the Goods and Services Act from April 1, 2010.

In more propitious times, Mr. Chidambaram as Finance Minister brought in the National Investment Fund to which all disinvestment receipts would go and these were to be used not to finance deficit but to use returns on NIF investments for meeting financing requirements of profit-making public enterprises and for social sector schemes. In the changed scenario, NIF may not be allowed to block use of the corpus for other than the stated purposes. It may be dispensed with.

Mr. Mukherjee implicitly acknowledged the role of disinvestment by a proposal to raise the threshold for non-promoted public shareholding for all listed public sector companies with the likely floor at 25 per cent. This is expected to improve the overall resources position for Government yielding the much-needed fiscal space to t bring down deficit and debt ratios to sustainable levels at least in the latter part of UPA II's five-year term. (IPA Service)