By now, regular readers should know that while I generally like India’s long-term macro story, New Delhi’s public finances leave a lot to be desired. After years of budgetary mismanagement, the country is a notable EM outlier in its fiscal/public debt dynamics, and for this reason, the FY2010/11 (April-March) budget, presented last Friday, was so important. I was looking to see a clear roadmap for fiscal consolidation, as with interest payments equal to 22% of planned expenditure – and government yields flirting with 8% – the stakes are rising fast.

EM Fiscal Deficit & Public Debt Matrix

Having read the document, my initial thoughts on India’s budget are ‘good, not great’. Despite the fanfare which preceded the budget delivery, the government’s actual fiscal deficit projections are little changed (with the central deficit projected to come in at 5.5% and 4.6% of GDP in FY2010/11 and FY2011/12, respectively). The underlying message of the budget is that the government is not yet willing to pursue an aggressive fiscal retrenchment strategy given a still-uncertain global economic outlook.

What is more, the government is putting its faith more in buoyant revenue streams and higher divestment proceeds – rather than on greater spending discipline – to rein in the fiscal gap. While this is understandable, especially given the mildly-disappointing Q409 real GDP growth print of -0.6% q-o-q (6.0% y-o-y) also released today, I do see the FY2010/11 budget as something of a missed opportunity, and caution that fiscal consolidation has to become a greater priority at some point to address investor (and rating agency) concerns.

The question I am asking today is: if a government cannot wind back stimulatory measures when industrial production growth is at a record 16.8% y-o-y and inflation has spiked to 7.3% y-o-y, when can it? Certainly doesn’t bode well for hawkish action from Messrs Darling and Geithner anytime soon…