V Anantha Nageswaran. Chief Investment Officer for an international wealth manager

How did the fiscal deficit to gross domestic product (GDP) ratio come down from 7.8% (including below-the-line items) in 2008-09 to 6.7% in 2009-10? The answer lies in the better-than- expected collection of direct taxes offsetting below-par indirect taxes collection and a massive increase in nominal GDP in 2009-10 (still not a done deal) over the budgeted growth number. The expected nominal GDP rise in 2009-10 was a mere 6.2%. The revised estimate suggests that the outcome would be between 10.5% and 11.0%.

So if direct tax collection and economic growth delivered deficit reduction, what has the finance minister done to consolidate the two good trends and to shore up the weak areas? He has reduced direct taxes by putting the top personal income tax rate of 30% at an income of Rs8 lakh and above. He has reduced corporate tax surcharge and raised the minimum alternate tax on corporate income to 18%. All these measures are reasonable.

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What is inexplicable is the decision to leave the service tax rate unchanged at 10%. The original rate should have been restored. At Rs58,000 crore for 2009-10, the final collections are estimated to be almost Rs7,000 crore lower than the Budget estimate. The government expects the service tax collection for 2010-11 to be Rs68, 000 crore. In other words, the finance minister is targeting additional Rs10, 000 crore without raising the service tax rate back to 12%. This is optimistic.

The government is assuming nominal GDP growth rates of 12.5%, 13.0% and 13.5% for 2010-11, 2011-12 and 2012-13, respectively. These rates imply a real GDP growth rate of around 8.5% to 9.0% per annum and a stable inflation rate of between 4% and 5%.

There is a reference to the Prime Minister’s remarks on opening up retail trade. The Budget does not offer much else by way of a road map for productivity and sustained high economic growth despite the promise of being a vision document.

One would have been heartened to see stress tests of how economic growth would hold up in the event of a double-dip recession in the US and/or in the event of sovereign debt stress in the euro zone. Expenditure proposals and revenue projections should have been made on a conservative basis for the next three financial years. The world has to navigate many minefields and so must India.

The most ambitious part of the fiscal deficit target is the targeted reduction in the expenditure on subsidies from Rs1.31 trillion (revised estimate for 2009-10) to Rs1.16 trillion. It is hard to recall a time the government has announced a revised budget estimate on subsidies outgo that is lower than the budgeted estimate. Yet, the government is expecting the expenditure on subsidies to be lower than the actual outgo under this head in 2008-09. Its eagerness on social expenditure is matched by its indifference to governance and accountability in the conversion of outlays to outcomes.

Overall, one comes away with the impression that the government is buying the approval of its governance from the vocal middle class with income-tax concessions while expecting economic growth to deliver fiscal consolidation. It was in keeping with this spirit that the finance minister chose to highlight both in his speech and in the Budget Highlights document the excise duty exemption for toy balloons.

These are the author’s personal views. Comments are welcome at theirview@livemint.com