Finance Secretary D Subbarao tells Business Standard that the impact of the Sixth Pay Commission award is unlikely to add more than 0.4 per cent of the GDP to the fiscal deficit. Excerpts:

What is the philosophy behind this Budget?

This Budget is driven by three key objectives. The first is to maintain the current growth momentum and build capacities for sustaining growth in the medium term.

Flagship programmes like the National Rural Health Mission and schemes under the Bharat Nirman Programme are aimed towards this and that is why allocations for such programmes and schemes have been substantially increased. The second objective is to contain inflationary pressures even as putting more money in the hands of taxpayers is a fiscal stimulus measure.

You will note that reducing fiscal deficit to 2.5 per cent has a huge anti-inflationary impact. The third objective is to expand the social safety net. Programmes like the National Rural Employment Guarantee Scheme and the expanded insurance schemes are targeted towards this end.

What new ground has been broken in this Budget?

For the first time ever, the Budget acknowledges off-Budget liabilities. This brings greater transparency into the numbers. The Budget has also given GDP growth estimates for 2008-09 at Rs 53,03,770 crore, assuming 13 per cent nominal growth over the advance estimate of 2007-08 at Rs 46,93,602 crore.

So what are these liabilities like?

If you look at the expenditure statement, data on the securities issued in the first and second supplementary demand for grants in 2007-08 in lieu of subsidies has been detailed. For oil marketing companies, the figure stands at Rs 11,257 crore and for fertiliser companies at Rs 7,500 crore. However, if you take into account additional securities of the order of worth Rs 29,000 crore for oil, the total liabilities will stand at somewhere around Rs 47,500 crore, roughly 0.9 per cent of GDP.

Why have you targeted only 13 per cent nominal growth? Should it be read as an indication of a likely growth slowdown and fear of higher inflation?

Our ballpark estimates are real GDP growth of 8.5 per cent in 2008-09 and annual inflation rate of 4.5 per cent. I expect the economy will grow faster than this.

How will the expected award of the Sixth Pay Commission be accounted for?

The award is yet to come. The previous Pay Commission award translated into an impact of 0.4 per cent of GDP. I do not expect it to be higher than this level this time around.

The 13th Finance Commission would be asked to set new Fiscal Responsibility and Budget Management targets. What are the expectations?

The FRBM rules have set out targets till only 2008-09. That does not imply that any government can violate the principles of fiscal prudence after that date.

The matter will be looked into by the finance commission, which will review central government finances as part of its mandate. A roadmap for fiscal adjustment given by a constitutional body like the Finance Commission will have greater credibility.

The revenue deficit has been paused for one year. Will it require an amendment to the FRBM Act?

There is no need to amend the Act. The deficit targets have been set out in the Rules and not the Act. In any case, the Act does not cast targets in stone. It provides enough flexibility.

However, the finance minister is mandated to explain the reasons for the shortfall in targets to Parliament. On the subject of revenue deficit, FM complied with this obligation in his Budget speech.

How should investors interpret the finance minister's remarks that capital flows will be managed actively in the short-term?

The statement is just a signal that the government is ready to act on this front and impose temporary measures as may be necessary if inflows far exceed the current account deficit. There is nothing in the statement to infer that we are going to do something immediately.