Many have already written off the budget on Monday 28 February as likely to be a dull transitional affair ahead of the main action this time next year when the Direct Tax Code is implemented. However, Credit Suisse sees it rather differently. Here is their pre-budget view:

The budget comes at a vital point in the economic cycle, presenting the government with key choices. Does it stimulate economic activity to offset the pain of higher interest rates and inflation, or choke off aggregate demand to deal directly with the pressing inflation problem as well the countrys gaping twin deficits?

In our view, we will see more in the way of stimulative action than fiscal tightening, although the finance minister might still publish a forecast for the central government budget deficit not too far above that of 2010/11. We expect the latter to come in at around 4.7% of GDP well below the original 5.5% objective, thanks partly to the bigger than anticipated windfall from the sale of 3G telecom licences.

Many of the key budget measures are likely to focus on inflation in one or way or another. We anticipate a sizeable boost to welfare spending, designed to protect the real incomes of the poorest members of society, as well as further import duty cuts on some foodstuffs/fuels and a rise in income tax allowances for those on lower incomes. Additional spending on agriculture, particularly irrigation, is also likely.

Of crucial importance, in our view, are detailed, credible and extensive steps to ease supply-side bottlenecks in agriculture as well as labour and product markets. After all, Indias inflation problem is not just a short-term cyclical phenomenon but a long-term structural issue that could seriously crimp future economic growth. Unfortunately, however, we would be surprised to see anything more than a fairly vague re-statement of the commitment to channel USD1trn of funds into infrastructure improvements during the upcoming 5-year plan.

The combination of a modestly expansionary budget, the absence of 3G licence revenues, weaker economic growth and higher debt service costs is likely to see the central governments financial position deteriorate in 2011/12. If our assumptions are right, then the deficit will probably rise to around 5.5% of GDP in 2011/12.

Hence, contrary to widespread expectations, we think net central government debt issuance in 2011/12 is likely to be higher than in 2010/11 by almost Rs 1 trillion, at around Rs 4.3 trillion; bond yields are likely to remain elevated.

With the government set to leave the Reserve Bank of India to deal with the immediate inflation problem, we believe additional rate rises are highly likely. We continue to expect the next 25bps hike to come at the 17 March meeting, followed by another of couple of quarter-point steps by end fiscal Q2.