Budget will be a platform to provide directions on reforms

This year's budget is significant for two reasons. First, the recent spate of corruption scandals has dampened investor sentiment and the budget will be an important platform for the government to provide policy direction on reforms. Second, the current macro challenge facing the government is one of containing inflation and sustaining growth, unlike the last two years when a fiscal stimulus was the need of the hour. Hence, the government's resolve in tightening its fiscal belt will be closely watched.  The Reserve Bank of India has been doing a lot of heavy lifting in terms of containing inflation, but monetary policy is less effective if fiscal policy is not supportive, particularly since the food price inflation partly reflects supply constraints in agriculture. At least on paper, the budget should persist down the path of fiscal consolidation. In FY11, the central government budgeted a fiscal deficit of 5.5% of GDP, but this will likely be bettered at 5.2% due to seignorage (inflation tax) and a one-time revenue gain from 3G spectrum auctions.