There were few surprises in the Union Budget on the government finances. The finance minister seems to have pulled a rabbit out of the hat - reducing the tax rate and keeping the fiscal deficit under check at the same time.

The finance minister expects revenue receipts to grow at 12.4 per cent (Rs. 2,31,745 crore). This appears reasonable even with the reduction in tax rates. On the direct tax front, the Budget estimates growth to come from larger number of assesses - more towns covered under the "one-by-six" rule and requirement for all companies to file returns. Growth in income and corporation taxes (15.1 per cent and 14.1 per cent respectively) will come as the tax base widens. For all direct tax assesses, the surcharge has been removed except for the 2 per cent imposed on account of Gujarat.

Total expenditure on the other hand is expected to grow only at 11.8 per cent (Rs. 3,75,223 crore). This is despite a plan expenditure growth of 16.1 per cent (second highest in the last five years). The main cut in expenditure growth has come in support to ministries' appropriations (growth of only 0.3 per cent) and pensions (3.6 per cent). Since much of these are salary payments, the target appears stiff.

Subsidies are a disappointment. At Rs. 29,801 crore it is the largest growth in the last four years. Interest payments are also budgeted to grow at 11.6 per cent despite the larger than expected cut in contractual savings interest rates.

Grants to states are expected to grow at 14.9 per cent(possibly due to assistance to Gujarat).

Defence expenditure is budgeted to grow at 13.8 per cent. Of this, revenue expenditure is expected to grow at 5.6 per cent (Rs. 42,041 crore) and capital expenditure at 35.0 per cent (Rs. 19,959 crore).

The Budget takes credit for Rs. 12,000 crore as disinvestment receipts. After this, the fiscal deficit is expected to be Rs. 1,16,314 cr. (4.7 per cent of GDP). Excluding disinvestment receipts there is no change in fiscal deficit as percentage of GDP (5.2 percent) from FY2000-01 to FY2001-02.

The Bond Market will be benefited by the Budget. The fiscal deficit projection is lower than the market expectation. We expect bonds to do well over the next fiscal year, as the government borrowing will be under control. The Budget also strengthens our earlier expectation of a monetary expansion led growth for industry. We expect RBI to cut rates in the next couple of months. Current structural rigidities in the debt market will also be eased by the introduction of the debt clearing house and electronic settlement of government security trades.

Debt Mutual Funds will benefit additionally from the reduction in dividend distribution tax of 10 per cent. We also expect the imposition on tax at source on interest greater than Rs. 2,500 per year to bring higher flows to bond funds.