Can Pranabda deliver 4.6% of GDP as fiscal deficit?

The intraday graph of Nifty looks like a hill. The expectations before the honorable finance minister started his speech before 11 AM were bleak. But once he uttered the magic number of 4.6% as fiscal deficit, the markets took off – mostly because of short covering. As he ended the speech and the market participants started using their right brain, they realized that 4.6% may not be achievable after all.

I turned my attention into the budget numbers to see if Pranabda could achieve what he has set out to achieve. There are more questions raised than answers.

1. To start with, the finance minister expects the tax collections to go up by 18%. Last year he budgeted an increase of 19% and over achieved it by 5%. Can this year be a repeat of last year? Looking at the last years numbers, one would believe that he could achieve the target. However, a look into Q3 FY11 GDP numbers could shake that belief. In Q3 FY11, the economy grew by 8.2%. If we break it up, Agriculture, Industry and Services grew by 8.9%, 6.4% and 8.8% respectively. These numbers certainly are not as appealing as they were in Q2 FY11. I wonder, if the growth of industry and Services is slowing down, how can the tax collections grow at 18%?

2. The above numbers also throw a spanner into the allocations made to MNREGA. There has not been an increase in the budget of MNREGA because the government believes that work force would be employed by private participants. It is only when the private participants are not able to employ will they approach the MNREGA program. With slowing economy, the enrollment in MNREGA may increase and the government may be compelled to increase allocation to the program.

3. As against a divestment target of Rs 40,000 crores, he could achieve only Rs 22,744 crores. This year he expects to do Rs.40,000. The question is: If he could not achieve the target when capital markets were hot, how could be achieve the target this year when markets look weak (atleast for now)?

4. The Finance Minister has collected Rs 150,000 crores as other non-tax revenue last year through the 3G and BWA auctions. This year he expects to collect Rs 62,000 crores. What can he sell now?

5. When crude oil has gone up from $80/bbl to $120/bbl, how can he expect to spend Rs 14,700 crores less on fuel subsidies? How can he spend Rs 5000 crores less on fertilizer subsidies?

6. The only way he could spend on subsidies is by direct transfer to end users as is done in Mexico and Brazil. However, for that to happen Aadhaar system has to be set up. Mr. Nandan Nilekani has been asked to submit a report on direct transfer of subsidy by Jun’2011 and put up the system in place by Mar’2012. If we cannot use the direct transfer facility to reduce leakage this year, how can we spend less on subsidies?

The more one thinks the more questions come up. I hope that our finance minister has a solid plan in place.