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Deficit reduction blues What sort of Budget will the FM present on February 29, 2008? As this is the last full-fledged Budget of the UPA government, there are expectations that it will be populist to bolster its fortunes in the forthcoming elections. This means huge spending commitments to its flagship programmes like the National Rural Employment Guarantee Scheme and Bharat Nirman, while seeking to adhere to the discipline of the FRBMA, according to which the revenue deficit must be eliminated and fiscal deficit cut to 3% of GDP by 2008-09. The fact that the Indian Economy has grown robustly at an average of 8.7% per annum during the last four years has, no doubt, provided a favourable context. Faster growth leads to bigger tax revenues, which can fund various welfare schemes mandated by the Common Minimum Programme without flouting the fiscal law. But with the UPA’s five-year term drawing to an end, all eyes naturally will be on how the FM shows that the deficit meets FRBMA targets. Prima facie, the targeted revenue deficit of 1.5% of GDP appears difficult, if not impossible, to meet this fiscal. The FM’s mid-year review of the Indian Economy in 2007-08 indicated that, as per FRBM rules, the revenue deficit should not be more than 45% of Budget estimates, but it was as high as 85.5 % during April-September 2007! Considering the difficulties of cutting non-plan revenue expenditures on subsidies and salaries—with the Sixth Pay Commission looming ahead—reducing and later eliminating the revenue deficit is indeed a daunting fiscal challenge. So far, the government has been able to show lower deficits by keeping subsidies on oil and fertilisers off-Budget, as they do not entail any immediate cash outgo. According to the IMF, bond issuance to oil and fertiliser producers is expected to reach 1.2% of GDP this fiscal, and if this is added to the Centre’s fiscal deficit, the latter would really be 4.5% of GDP, the same as in 2006-07! The fact that fiscal consolidation has perhaps stalled is also seen in the combined fiscal deficit of Centre and states remaining at just over 7% of GDP since 2004-05. Now, with election season ahead and compulsions to further loosen the purse strings, the big question is, how the FM will stick to the FRBM straight and narrow. Expect the revenue balance to be attained some time in the future, with the next government holding the fiscal can.