Recent stream of data releases and RBI stance of maintaining status quo on rates brings forth enhanced focus on the Union Budget. A double-edged sword seems to be hanging on the economy, one being concern on inflation and two, the threat to tax revenues as growth moderates. 

A moderation in growth is evident in recent industrial production numbers. Consumer demand has softened, especially in the consumer durables segment, which is interest rate sensitive. This will eventually get reflected in the GDP numbers. However, RBI has kept rates unchanged in the wake of challenges on the inflation management front. This is likely to prompt the Centre to take fiscal measures to induce consumption demand.

With government having to spend in the election year, the scope for fiscal prudence is somewhat limited. In addition to continuing burden of subsidies, the outcome of Sixth Pay Commission will further exacerbate the bloating expenditure. With oil and fertilizer prices ruling high, subsidies are likely to mount further. Furthermore, any further gains in the value of the Indian Rupee are likely to push export subsidies higher. Overall, there are strong headwinds in controlling expenditure.

Given the pressure on expenditure, it is imperative that tax collections remain buoyant. In turn, growth momentum needs to remain intact to generate adequate revenues for the government.  To propel growth at this juncture, fiscal stimulus in some of the stressed sectors is called for. Going forward, this may need to be complimented with monetary easing.