The one thing that stood out in the Finance Minister's Budget speech yesterday was the government's commitment to bring the fiscal deficit down. He stated that the fiscal deficit was down to 5.1% of GDP for FY11 (the last Budget had put the figure at 5.5%). For FY12, FY13 and FY14, the targets have been set at 4.6%, 4.1% and 3.5% respectively.
Indeed, the fact that the government acknowledges the importance of bringing the deficit down is encouraging. But whether it actually manages to do so is another matter altogether. For starters, the high rate of inflation and crude prices are making things difficult. Because high food prices have fuelled inflation, the government is reluctant to free the prices of diesel, kerosene and LPG lest it inflates an already rising inflation. But to maintain status quo, the government will have to provide more subsidies. An increase in subsidy bill will put further pressure on the government's stretched finances.
Now oil prices do not seem to ease off anytime soon. For one, the crisis in the Middle East has yet to die down. Hence, a scenario where crude prices remain firm in the medium term cannot be ruled out. But even in the longer term with demand likely to outpace supply, oil prices would most likely be heading northwards. For India, which imports 70% of the oil that it consumers, rising crude prices will have an impact on its trade deficit plus on the government's policies when it comes to subsidies.
Thus, with these set of problems, the government's fiscal deficit targets look quite ambitious. It will be interesting to see how it manages to do so going forward.