The government faced the option of projecting a lower but unrealistic deficit number, or a higher, more credible number. Choosing the latter is prudent, in our view, and we do not see much room for slippage. The medium-term fiscal policy statement projects the fiscal deficit to decline further to 4.5% of GDP in FY14 and to 3.9% in FY15
In our view, the government has been realistic in its tax revenue, disinvestment and growth projections. The hike in indirect tax rates is inflationary, but was necessary to raise the tax-to-GDP ratio. Quality of spending has also improved, as capital expenditure is projected to rise faster than revenue expenditure. The government has committed to restrict expenditure on subsidies to under 2% of GDP from 2.4% in FY12, but with no concrete measures yet, we see room for overshoot on the subsidy bill. However, there is enough of a cushion in other spending to be able to absorb this, in our opinion.
We also do not see much populist policy in the budget.
