The newly-elected Indian government's pledges to the farm and social sectors, even as it slows down on the money-spinning sales of state firms, pose a real fiscal challenge, say analysts.
On Thursday, the left-backed Congress-led coalition announced its policy blueprint, outlining plans to nearly double spending on education to six percent of gross domestic product (GDP), and to boost spending on health to two to three percent of GDP.
Analysts said the challenge will be to find resources to meet the extra expenditure, without borrowing more.
"The resource challenge is going to be huge. On a GDP of 25 trillion rupees, they are looking at an expenditure of about two trillion rupees for health and education alone," said S.P. Prabhu, analyst at IDBI Capital Market Services.
"Given projected revenue receipts of about three trillion rupees in the interim budget, the big question is where will they find the money from?"
Analysts are worried that India's huge fiscal deficit, currently running at nearly five percent of GDP, could grow if the new government does not offset spending plans with higher tax revenues and other measures like stake sales in state-run firms.
"The challenge will be to either broaden the tax net by cutting exemptions and bringing more services under the tax ambit or increasing efficiency in government spending or doing both," said U. Sankar, economist at the Madras School of Economics.
For its part, the government says it is committed to fiscal consolidation by eliminating the revenue deficit by 2009.
India's new finance minister, a Harvard-educated reformist, seemed game for the challenge.
"We do not see them as irreconcilable objectives," P. Chidamabaram told reporters on Friday, when asked if the higher social sector spending would impact the fiscal consolidation.
"There is tax buoyancy, tax administration has improved and we shall work to further improve it. We will find the resources to make critical investments and investments are needed critically in agriculture, infrastructure and manufacturing."
Analysts said the new government could, while retaining ownership, still raise cash by selling stakes in state-owned firms such as power gear maker Bharat Heavy Electricals Ltd (BHEL) and National Aluminium Co.
Energy giant Oil and Natural Gas Corp (ONGC) - which earned the previous government a record $2.43 billion - could also raise up to 350 billion rupees ($7.7 billion) according to M.R. Madhavan, strategist at Bank of America.
"While the policy rules out privatisation of profitable state firms, it does not rule out disinvestment," said Prasenjit Basu, managing director at Robust Economic Analysis Ltd in Singapore.
"ONGC and GAIL were disinvested very successfully earlier this year and there is no reason why some of the other larger and attractive state firms such as BHEL and NALCO cannot be brought to market and successfully disinvested."
It may also be premature to judge the new government on the basis of a political document reflecting the varied ideological positions of a huge coalition, analysts say.
"What the government actually does in the budget will be the real reflection of its intentions," said Bank of America's Madhavan. The budget is expected in late June or early July.
Some analysts are already looking for more enduring measures to address India's worrying deficit.
"What will be needed are not just asset sales or debt swap programmes, which provide only temporary answers, but structural changes that address the roots of the fiscal problems," he said.
"The pledge to speed up introduction of a countrywide value added tax is to that extent a big step in the right direction".