On February 28th the government presented its budget for 2011/12. The UPA plans to reduce the central government's fiscal deficit from an estimated 5.1% of GDP in 2010/11 to 4.6% in 2011/12. The deficit in 2010/11 is estimated to be lower than the official target of 5.5% of GDP, largely because of windfall revenue from the sale of third-generation (3G) telecoms licences early in the current fiscal year. High inflation in 2010/11 has also boosted nominal GDP, thereby flattering the budget deficit figure when expressed as a percentage of GDP. Further fiscal consolidation is planned for the medium term, with the deficit projected to fall to 3.5% of GDP in 2014/15. In 2011/12 total expenditure is set to rise by 3.4% in nominal terms compared with the revised estimates for spending in 2010/11. However, in real terms this amounts to a significant degree of fiscal retrenchment.

The assumptions underlying the budget are optimistic. The document assumes real GDP growth of around 9% (plus or minus 0.25 percentage points) in 2011/12. Wholesale price inflation is expected to fall to an average of 5%; this projection assumes a good monsoon and a moderation of global commodity prices from their high current levels. These assumptions may be unrealistic, however. Given the government's planned fiscal retrenchment, rising interest rates and a global environment that remains challenging, the forecast rate of economic growth in India is subject to significant downside risk.

The main budgetary risk is that the government's revenue and spending projections will be undermined by unexpectedly slow growth. The government projects that corporate tax collection will rise by 21.5% in 2011/12 (marginally faster than in 2010/11) and that excise tax revenue will increase by 19% (compared with estimated growth of 33% in 2010/11). Critics say that the latter target is particularly optimistic, given that in the past decade revenue from excise duty has grown by more than 12% in only one fiscal year-namely 2010/11, when the central excise duty rate was raised from 8% to 10%.