Fiscal deficit estimates are unconvincing

Deficit correction has been envisaged through increase in indirect taxes -- mainly service tax, and non-tax revenues (primarily through sale of telecom licences). Expenditure cutbacks are expected to come about through reduction of major subsidies. The reliance on indirect taxes has inflationary potential.

There is no evidence of expenditure rationalisation in the Budget, except for the proposed amendment to the introduction of a Medium Term Expenditure Framework. However, the efficacy of such a policy measure (considering that the next Budget will be a pre-election one) seems open to doubt. Deficit targets will once again not be met. The year 2012-13, compared with 2011-12, is not expected to see any dramatic changes in economic growth on the domestic or global front. Growth and fiscal outcomes will be similar, except for some improvements on the revenue side (taxation).

To maintain the budgeted deficit numbers, the government will resort to cutbacks in Plan expenditure, leading to reduction in developmental expenditure. In addition, on account of market uncertainties, disinvestment proceeds may not be fully realised. Keeping in view the past years' experience of sale of telecom licenses, the amount expected to be raised this time around looks over-optimistic.

The budgeted fiscal deficit at 5.1 per cent may slip further to 5.5 per cent of GDP.