It has been over a week since the Union Budget for 2009-10 was presented, and we have had sufficient time to really digest the content after all the preliminary reactions came in on the 6th. This Budget is out-and-out Keynesian in spirit where there is unconcealed aggression in increasing expenditure to provide a further stimulus to the economy. This may be interpreted by the more conservative critics as being too profligate. At any rate, the result is that the fiscal deficit is as large as 6.8% of GDP which is the highest ratio since 1993-94. The revenue deficit at 4.8% of GDP is the highest ratio for the central government in recorded time. While overall expenditure has increased by 13.3%, plan and non-plan expenditure have increased by 15% and 12.5% respectively. Quite clearly the government has gone in for a fiscal deficit holiday, if it may be so called, and has kept the FRBM rules in the background. However, this approach may just be pragmatic. Even countries like the US and UK are running double digit fiscal deficit ratios.

Keynes had advocated that in times of an economic slowdown, governments should increase expenditure or reduce taxes so that people spend more which then through the ?multiplier? effect induces investment, which in turn generates income through the ?accelerator?. In an extreme situation, the government could just spend for the sake of spending (non-development expenditure) where those receiving the same spend the money by demanding goods. This approach has been advocated quite assiduously by most economists in times of an economic slowdown when conventional monetary measures fail to deliver adequately. It may be remembered that even last year, the government had supplemented the CRR and repo rate cuts with tax cuts and expenditure allocations to engineer growth as these measures are more direct and work faster.

The increase in plan expenditure is project based and encompasses those on infrastructure, irrigation, water, power, gas, weaker sections, interest subvention (though the burden is on banks) etc. which will have a corresponding increase in production of goods and services. The non-development expenditure is in the form of interest payments, subsidies (which are lower this year) and defence payments. To top it all, tax collections are to increase only marginally, with only corporate tax collections showing an increase while collections from income, excise and customs collections showing a decline over last year. Therefore the stimulus has two faces.

There are three issues here. The first is whether this stimulus will work? The answer is at best a shrug of the shoulders because while the FM has stated that the fiscal deviation last year of 3.7% of GDP (budgeted and revised fiscal ratio) was the result of the stimulus package which brought about the 6.7% growth in GDP, it is a matter of conjecture whether it was brought about by a fall in tax collections as well as higher expenditure. In any case, the important thing here is that the allocations should materialise. The past is replete with stories of budget allocations not being met, and there is a lot of window dressing done towards the end of the year to show that the money is committed, while the actual disbursements are not made until the next year. In fact, even when it comes to projects like irrigation there have been several instances of the projects not being completed with either the ?well? or ?motor? or ?irrigation track? missing. Maybe the resources should be channelled to complete these projects rather than embark on new ones.

The second issue is about the FM stating that the government was committed to meeting the FRBM targets in the medium term. While a commitment is assuring, it would have been better to have a time frame as expenditures cannot be rolled back that easily in future. While higher deficits can be defended under the present circumstances, it could mean harsh measures when we revert to FRBM guidelines. Therefore, the present relief provided may at best be transient and these measures have to work to propel GDP growth to bring in higher tax revenue in the next few years.

The third issue is more serious. The fiscal deficit is now past Rs 4 lakh crore, with the gross borrowing programme being enhanced now from Rs 3.62 lakh crore in the interim budget to Rs 3.97 lakh crore. Quite clearly there could be a problem on liquidity as well as interest rates when this happens. Therefore, the direct fiscal stimulus provided would have a monetary implication and RBI will have quite a job on its hands. This is so because higher government borrowing means a larger quantity of government paper in the market which pushes down the prices and increases the yields, thus providing an upward thrust to interest rates.

Therefore, the present stimulus, like all bold measures, has some doubt attached to it. Let?s hope it works because the gamble with the fiscal deficit number is a big one.

?The author is chief economist of NCDEX Ltd. These are his personal views