There are sharp increases in plan allocation to the departments of atomic energy (up 68 per cent) and space (up 62 per cent). The enhanced expenditures will further shakti. It is therefore hardly surprising that the fiscal deficit projected for 1998-99 is a not insignificant 5.6 per cent of the GDP. This is of course less than last year's 6.1 per cent.

Sinha makes it out that further deficit compression will not be warranted this year in view of the need to give stimulus to growth. However, the revenue deficit (component of the fiscal deficit) is 3 per cent of GDP this year against 3.1 per cent last year.

Sinha's claim that he is not squeezing the fiscal deficit in the interests of growth is not strictlycorrect. He has not squeezed revenue expenditure in support of development expenditure. True, the budget talks of a larger central plan: the expansion by Rs 24,154 crore is impressive. But budget support will contribute only Rs 8835 crore to this increase (or just over a third).

Public enterprises are expected to raise the balance (Rs 15319 crore) through internal and extra-budgetary resources. Last year, they fell short of the IEBS target by Rs 8,305 crore. Thus, the fiscal deficit of 5.6 per cent (of GDP) is not in support of the plan investment. The deficit is large despite the relatively small increase in budget support. Note that last year, budget support to the plan was significantly short of the target.

There is no guarantee that will not happen this year, especially in view of the overarching priority to shakti: ``I will consider further increases in budgetary support (to defence) during the course of the year, if necessary''.

There can be no quarrel with the priority to defence. But Sinhamakes it out that no great sacrifice is required in this regard. Taxes have not been hardened. Sinha has kept Chidambaram's dream budget intact. Indeed, he has made it somewhat more attractive by increasing the statutory deduction and enhancing the first zero tax slab. The message of the budget is: We will have guns and butter too.

The expectation was that the finance minister would introduce a fourth tax slab for incomes above, say Rs 3 lakh or Rs 5 lakh with the excess attracting a higher tax rate than 30 per cent. The finance minister has avoided introducing this element of progression in income tax. Instead, he has chosen to exclude high salary earners from allowable statutory deduction. However, this discriminates against salary earners since non-salary earners are entitled to specific deductions.

The trouble is defence expenditure is unproductive. Its enhancement against the background of an unchecked revenue deficit will give an inflationary push. And if government increases market borrowings (upRs 6,000 crore) and public enterprises resort to the market to raise investment, interest rates in the economy will harden. This could deter investment by the private sector. The guns and butter logic seems facile.

The finance minister has, however, used the swadeshi objective to good effect by imposing an eight per cent non-modvatable duty on imports to raise customs revenue. He is right in claiming that this is not a protectionist measure. This is a kind of reverse countervailing duty. Domestically produced goods are at a disadvantage: besides excise they have to bear sales tax and local duties which imports are exempt from. The duty does away with this anomaly.

But the level playing field regime excludes the capital goods sector! capital gods are the largest segment of industry hurt by steep import duty reductions. This sector also faces the disadvantage of local taxes, besides excise. Why the swadeshi budget should discriminate against domestic capital goods is a mystery that Yashwant Sinha will havetrouble explaining.

He has hit hard at the modvat scheme by restricting the availability of modvat credit by 5 per cent of the duty paid on inputs used in the manufacture of excisable goods. It is perhaps true that the modvat scheme was being misused by manufacturers because there is no way of cross checking their claims. The restriction is thus justified. However, this also requires a corresponding change in excise duty rates. This Sinha has not done because of his concern for revenue.

Another revenue raising measure is the expansion of the maximum retail price based excise levy to a range of luxury goods-from chocolates and pan masala to glazed tiles, razor blades and domestic electrical appliances. Likewise the extension of service tax on high value services should be a source of quick additional revenue.

In terms of levies, the budget is far from harsh. This is because Sinha has used excise and import duty reforms to raise revenue. True, there are specific measures like the increase in the price ofurea by a modest Rs 1,000 per tonne. This is justified but will be opposed by farmers in states which are just taking (or should be taking) to the green revolution, notably, Orissa and Bihar. The impost on petrol is nominal and is in any case a cess for road development. But the principle that road users must pay for roads should have been extended to diesel users (luxury cars and trucks).

Finally, the finance minister has gone ahead aggressively to woo NRIs: the aggregate limit of their investment in a company has been doubled, special bonds will go floated by the UTI and the State Bank to get them to invest, and a special visa free regime is to be created with the issuance of persons of Indian Origin cards.

This is indicative of fears that foreign currency inflows will slow down in the wake of sanctions. This means the increase in official foreign currency reserves will be small. Consequently, the expansion of money supply (stemming from the expected decline in purchases of surplus foreign currency fromthe market by the Reserve Bank) will be less than it was in 1997/98.

It follows that correspondingly, monetised deficit on government account will have to be expanded (that is, if a squeeze on money supply growth is to be ruled out). But the budget shows no provision for the monetised deficit at all! It may be that Sinha has no idea of the monetised deficit he will incur.