Cash-strapped India seen on course for tough budget

Then on Friday, a railway budget was announced which was widely criticised as populist — it did not touch subsidised passenger fares. With few options available to rein in the country’s gaping fiscal deficit, the government will be forced into politically contentious decisions such as reducing or removing subsidies on public utilities and raising some taxes.

"There seems to be a general political consensus that the economy needs some kind of harsh corrective measures," said Ashish Nandy, a political analyst. "Anyway, no major elections are due in the near future so this may be the best time for the government to be bold and take some tough decisions. The state elections are also out now, so politics could become less important," he said.

Markets have been bracing for a tough budget since Sinha said this month that the government had run out of soft options. Last week, President K R Narayanan said the fiscal deficit was worrying and that some subsidies need to be cut.

Prime Minister Atal Behari Vajpayee sounded a similar note when he told members of the ruling coalition that "harsh medicine" was needed to cure the country’s economic ills. With the fiscal deficit at around 84 per cent of the full financial year target by end-December, the government needs to find some ways to raise revenue and check its spending.

The government has targeted a fiscal deficit of four per cent of gross domestic product for 1999/2000, compared to 4.5 per cent a year earlier but independent analysts expect it to be five per cent or above.

Analysts are encouraged by the government’s record in pushing ahead with economic reforms in its four months in power. It has opened up the state-run monopoly insurance sector to private and foreign investors, raised petroleum product prices once and shown willingness to shed control in state-owned firms.