The finance minister may announce a deficit target of about 4 percent of GDP, but spending pressures will mean that achieving such a target will be quite a challenge in fiscal 06/07.
Inflationary pressures are not relenting. The economy is doing really well. Salary hikes have been phenomenal.
The finance minister is assuming an optimistic outlook for tax revenues, especially corporate taxes. He expects corporate tax collection to increase a hefty 28.4 percent, despite indications that industrial activity is rolling over. Perhaps he is betting on improving compliance.
Inflationary trends have been curbed to some extent.
The cash shortage in the economy is temporary because it is a consequence of government not spending enough and repayment of debt by the State Bank of India in December. Capital inflows are still strong.
Given the continued higher growth trajectory, the risks remain that interest rates need to be adjusted further up.