As the post-budget din dissipates, it is instructive to reflect upon some details that have been ignored, received only a passing reference or, if noticed, have typically been pushed to the side. Some of these details hint that there will be only marginal room for the Reserve Bank of India to ease monetary policy. This is despite the government sticking to its fiscal deficit forecast of 3.5% of gross domestic product (GDP) for FY17 and its market borrowing being slightly better than expectations.

Having decided, probably for both political and economic expediency, that the budget’s focus had to shift to be pro-farmer, pro-poor and pro-rural sector, the government had a critical decision to make: to slip or not to slip on the fiscal deficit red line. An important reason perhaps for the welcome headline discipline was the unpleasant optics of missing the fiscal deficit target because of a push towards these sectors. Rightly or wrongly, it would have been interpreted as a “populist" push.

Investor expectations from the Narendra Modi government have already undergone a disappointing reset. Digesting a leftward shift in the budget while abandoning the fiscal commitment could have been too much to handle for investors. It wasn’t worth the risk.

The government undoubtedly deserves immense credit for sticking to the already announced fiscal trajectory. There is a lot in the budget that is welcome. Some steps, if implemented properly, could even be transformational. The monsoon this year, more likely than not, could be a blessing after two consecutive years of disappointment.

The key question, however, is the credibility of the fiscal math—an area of chronic weakness. This is where the halo around the budget begins to fade. Indeed, optimistic revenue assumptions, dependence on new cesses, unpaid food and fertilizer subsidies and sharply higher off-budget spending leave a lot to be desired. One cess appears to be a back-door increase in service tax. The poor transparency about the allocation for the Seventh Pay Commission and One Rank, One Pension is disappointing.

The fuzzy math is one area where the FY17 budget is disappointingly little different from prior budgets. The reliance on cesses perhaps highlights the government’s struggle to improve tax collection without the heartburn of raising the posted tax rates. Cesses also allow the government to avoid sharing this revenue with the states.

The success in achieving the revenue forecast is entirely on a wing and a prayer about record-high divestment (including strategic sales) and telecom spectrum auction. Together, these two account for a chunky 0.8% of GDP. Add to this the optimistic nominal GDP growth forecast showing acceleration to 11%.

Admittedly, there is some buffer on the revenue side because of one-off items such as the Income Disclosure Scheme and resolution of tax disputes. The government should be applauded for not including these in its revenue estimate. But surely there is something wrong from a fiscal responsibility standpoint when the success in achieving the revenue target is a function of one-off asset sale items, and any possible cushion is also because of one-off items.

It gets better. There is a sizeable jump in off-budget spending in FY17 to slightly under 1% of GDP, according to some estimates. There is also a lack of clarity on the allocation for pay revisions in the budget. Strangely, officials are comfortable about sharing the revenue expected from the telecom spectrum auction that hasn’t even occurred, but are circumspect about revealing what they have counted for pay revisions.

Add to this the long-standing kick-the-can-down-the-road approach facilitated by the cash—instead of accrual—basis of the budget transactions: there is reportedly around 1 trillion (0.7% of GDP) in unpaid dues to the Food Corporation of India and fertilizer companies.

The government also appears to be hinting at back-door easing of the fiscal deficit constraint by revising the fiscal responsibility legislation, which could reportedly have a narrow band for the fiscal deficit target. Add to this the implications of the political bugle call for doubling farmers’ income in five years. Surge in productivity to underscore such an outcome is a pipe dream. The income goal probably cannot be achieved without outsized increases in minimum support prices, which in turn could rekindle concerns about inflation.

Government officials always exude uber-confidence about every budget’s fiscal math. But there is a reason why India has low fiscal credibility. In terms of creating additional space for monetary easing, the FY17 budget doesn’t really do much and, actually, has several risks embedded in it. There is likely to be a 25 basis point rate cut, but that is limited comfort.

Reserve Bank of India governor Raghuram Rajan shouldn’t be swayed by the fiscal cosmetics. He has plenty to worry about for achieving the ambitious 4% inflation target and the already poor monetary transmission. He should also spare a thought for finding the incremental buyer—other than the central bank and some take-up by foreign investors—of the huge supply of all kinds of on and off-budget consolidated government and quasi-government bonds.

It is entirely governor Rajan’s choice if he wants to be a silent spectator to the fiscal smoke and mirrors. However, such an outcome would be egregiously disappointing.

Rajeev Malik is senior economist at CLSA, Singapore. These are his personal views.

Comments are welcome at theirview@livemint.com

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