The budget week is on and the ever-present speculation over the Finance Minister’s moves will attain a feverish pitch over the next few days, culminating on February 28. This could be the last full budget of the UPA-2 government before next year’s general elections. While that has led most analysts to assume a “populist” budget, the Finance Minister has been promising fiscal prudence, especially to overseas audience.

It is obvious that there are definition problems: the budget would hopefully try to balance the perceived conflicting objectives of prudence and populism. In fact, in the Indian context, there cannot be one without the other in the largely political exercise that the budget is.

One, given the bleak gross domestic product (GDP) growth outlook, the budget will try to stimulate growth by seeking to step up investment. Unfortunately, the scope for fiscal measures is restricted because of the need to curtail deficit.

It is certain that the Finance Minister will stress on the various administrative measures, already announced to speed up project clearances and reduce delays. There would be the usual emphasis on infrastructure. Many new sops are likely. The setting up of one or a few new infrastructure-dedicated institutions may be announced. Existing schemes to provide long-term finance might be spruced up, and new ones announced. Nearly all of these may not have direct budgetary implications but will certainly influence the sentiment.

Two, the Finance Minister has committed to rein in fiscal deficit to within 5.3 per cent of GDP this year (2012-13) and to below 4.8 next year. Reports speak of the Finance Minister wielding the axe, cancelling the last tranche of a large government borrowing programme (Rs.12,000 crore) among other steps to bring down the deficit to within the target by March 31. On the receipts side, the government will very likely press the pedal on the disinvestment programme to garner as much as possible, close to the target of Rs.30,000 crore. One hopes that the government does not cut back on development expenditure.

Achieving next year’s target — of keeping the deficit within 4.8 per cent of GDP — will be even tougher. Social expenditure on various anti-poverty schemes cannot be scaled down although there is a strong case for combining some of them to improve delivery. The food security bill will be rolled out next year. The government hopes to reap large dividends from the scheme. In the run-up to the elections, there is no question of scrimping here.

The relatively inflexible nature of social sector spending and more generally of non-Plan expenditure would force the government to look at savings elsewhere. Subsidies will remain a problem. The recent arrangement on diesel pricing — where gradual increase in the retail price has been made possible — and a cap on LPG cylinders are a positive factor but much more needs to be done. So, without compromising on growth, the Finance Minister has to deliver a budget that would keep the fiscal deficit within 4.8 per cent of GDP.

It is the strategy that he will adopt to achieve this goal, rather than the deficit target itself, that will be more significant and, therefore, closely watched.

Closely related to the fiscal deficit is its twin, the current account deficit (CAD), which is merchandise trade deficit plus or minus earnings from invisibles (software earnings and inward remittances). By all accounts, CAD is disconcertingly high, touching 5.4 per cent [of GDP] in the September quarter, and expected to be even higher in the next quarter. Unlike in the case of fiscal deficit, the government has little leeway. It can step up export promotion measures but trade revival depends on the economic situation in the developed world. Petroleum prices are not expected to come down, and there is not much that can be done about gold imports except to popularise paper substitutes (gold-linked deposits and so on) to wean away demand. The CAD has exposed the economy’s vulnerability by making the external sector dependent on volatile portfolio flows.