Bleak House Blues

For the last couple of years, the then Finance Minister P Chidambaram assured us that he was moving the country towards 'Fiscal Responsibility', despite all evidence that buoyant tax revenues were being frittered away on expensiveprogrammes -- from debt relief to the NREGA; from the 6th Pay Commission to subsidised petrol and diesel. Now looking after thehome ministry, he has the perfect alibi of the global slowdown (shouldn't ministers be anticipating these things, with alltheir -- I mean, our -- resources?)

And today, in the speech proposing the interim budget, Pranab Mukherjee conceded that the fiscal deficit for FY '09 is likely to be in the region of 6% of GDP. For FY '10, he projects the fiscal deficit at 5.5%. However, this figure is suspect, as it assumes that gross tax revenue will be Rs. 6.71 lakh crore. This compares to the revised FY '09 figure of 6.28 lakh crore, thus assuming that tax revenues will grow by 6%. First, we don't know how much more slippage there will be this year, as a great deal of tax is collected in March. Secondly, my own feeling is that projecting growth of 6% in FY '10 is very optimistic, as the world-wide recession is not going away any time soon.Third, the new government which comes in this summer will be tempted to make all manner of tax concessions.

In sum, we should be looking at an on-going fiscal deficit of upwards of 6.5%. And this is for the central government. The deficit target for the states, which is currently 3%, has been 'relaxed' by 0.5%. Add to this off-budget provisions such as oil bonds etc., and we are talking about an effective deficit in the region of 11%.

From a budgetary point of view, it is as if the good times of 2003-07 never happened.

This fiscal situation of course means that the government will have to be borrowing larger and larger sums from the market, crowding out private sector investment. In a scenario where global capital flows are drying up, this means that money for investment is going to get more and more scarce, and we can say goodbye to projections of 9% growth for a long, long time.

In keeping with the convention of an interim budget not presenting any new budget proposals, this morning's session was not able to offer relief to any of the sectors whichhad been lobbying for the last several weeks. The markets were swift to recognise the bleak scenario ahead, and registered a fall of over 3%. This is in keeping with the sombre mood in markets around the world.

From Mohit Satyanand's daily blog PrepTalk for outlookmoney.com