'Deficit must be well within 5% of GDP'

"To be, or not to be, that is the question: Whether 'tis Nobler in the mind to suffer

The Slings and Arrows of outrageous Fortune, Or to take Arms against a Sea of troubles, And by opposing end them"

The above soliloquy from William Shakespeare's play Hamlet truly sums up the fate of our FM when he rises to present the budget this year and address larger issues of the fiscal front, issues of fiscal deficit containment which would require very tough measures be it on introducing reform measures such as DTC or GTC to widen the tax base or decisively cutting down on subsidies on food and fuel that are a huge drain on the exchequer.

This is the fourth budget being presented by the UPA Government and this is probably the last budget which allows room for introducing structural reform measures without the overhang of a General Election which will surely drive the next year's budget towards populism.

The expectations from the budget on big ticket reforms will largely be driven by the outcome of the UP election. A good performance by the Congress in UP would allow them to attain kingmaker status and therefore tilt the electoral math at the centre (in the Lok Sabha) with a post poll alliance with a party that played huge role in helping the previous UPA regime negotiate a crucial vote of confidence on the Indo-U.S. nuclear deal in 2008. With old allies from East playing spoilsport in the reform process, the reforms agenda cannot move without fresh blood (read allies) being infused.

Any demanding citizen of the country would expect the FM to focus on containing the fiscal deficit within a respectable number say 4.5 to 4.8% of GDP.  Any number tilting towards 5.5 to 6 could lead to a great disappointment for foreign institutional investors fuelling the current market rally and moreover foreign rating agencies may start reworking on India's rating. The priority must be to keep the deficit well within 5% and I expect the FM will not disappoint us on this front.

Having set our expectation of the FM to curtail the deficit now, the key is will he raise revenues or cut expenditure to curtail deficit.  Needless to say it would have to be a combination of both i.e. raising higher revenues as well as cutting the subsidy bill. The challenge for the FM will be to raise revenues without increasing tax rates.

Without raising tax rates can the FM widen the tax net and bring in more revenues? It is expected that DTC system would improve compliance levels as rates of corporation tax and surcharge are reduced and tax base is widened. However, will the DTC be rolled out this year? The DTC is under consideration of the Standing Committee on Finance and is unlikely to be rolled out this year.

The other big ticket reform expected on GST is also unlikely to be introduced this year. In respect of GST while the Bill to amend the Constitution for introducing this tax was tabled in March 2011, the draft GST legislation requires consensus on a number of issues involving both the Centre as well as State governments.

If both DTC and GST cannot be rolled out this year which is the most likely situation one cannot expect the tax rates to go down. Will it go up? Maybe not given such retrograde step will be unwelcome in all quarters.

On the subsidy front, will the FM be able to cut back on food and fuel subsidy to deliver some nirvana to monetarists who have time and again called for monetary efforts to be backed by fiscal prudence and fiscal measures to back the monetary stance.

The RBI Governor has in every address subtly made this point. Will the FM pay heed? One needs to wait and watch how he tackles this issue. It is unlikely that on the expenditure front the government would move towards deregulation of pricing of diesel for controlling its expenditure on petroleum subsidies.

What's more the FM will face additional pressure from his counterpart in the Food Ministry to provide for additional food subsidies when the proposed Food Security Bill is enacted and implemented.

At this point the toughest job one would find being is being in the FMs shoes. The challenges are known and how he would respond is difficult to guess. It is better for market men to keep expectations low.  Any delivery from thereon will be a positive surprise for markets.