Chidambaram noted that the larger expenditure on account of allocations for health, education and the social sector means that the budget would not achieve the target for lower revenue deficit set out by the FRBM (Fiscal Responsibility and Budget Management) Act. The budget estimate for 2008-09 for the fiscal deficit, at 2.5 per cent of GDP, is, however, below the 3 per cent target. But this figure does not include the subsidies given by the Central government to oil companies, the Food Corporation of India and fertiliser companies, for which it borrows separately through bonds. Last year these were estimated to be 1 per cent of GDP. This year they are expected to be higher. So, taking these into account, the fiscal deficit may be around 3.5 per cent of GDP, if not higher. Further, this number does not include the largesse of Rs 60,000 crore to farmers. If this is to be covered by government borrowing, it will put further upward pressure on interest rates. This is not good news for households and industries already facing high interest rates. With prospects of a slowdown in domestic and global demand, it would not be surprising if investment, that engine of growth the government appears to be taking for granted, is affected.

To compensate for the impact the budget is likely to have on interest rates, there should be an urgent and immediate change in monetary policy. Instead of waiting for data on slowdown to come in, or for the next policy announcement, the Reserve Bank of India should step in and cut interest rates before brakes are put on the Indian economy’s current growth momentum.