India’s Finance Minister Pranab Mukherjee presented his career’s fourth budget and second straight budget for the UPA government in the Parliament with a clear signal that India has notched a respectable growth coming out of the global recession. At the same time, he stressed that now India needs to get back to the basics and ensure that the fiscal deficit is tamed and rolled-back to 5.5% in 2010-2011 and 4.8% and 4.1% in 2011-12 and 2012-13 respectively. In the budget, the FM announced 46% of the plan allocation to be set aside for the infrastructure, stressing the need for the economy to meet inclusive and broad based growth. In the Union Budget Highlights 2010 the important announcements of Union Budget 2010 are: Aam Aadmi is on top priority. Contrary to expectations, the FM has announced a major relief in tax slabs for the Indian middle class public at large as follows: No tax limit up to income of Rs.1.6 lakh; for income between 1.6 lakh to 5 lakh, the tax liability will be 10%; for income between 5 lakh to 8 lakh, the tax liability will be 20%.; and individuals with income of above 8 lakh will have tax liability of 30%. The recent Indian budget has uncovered Nepal to challenges and opportunities, something which has left the government reeling under the pressure of high inflation and historic high balance of payment deficit. Moreover, the Indian budget has raised public spending, hiked duties on petroleum products and taxes on non-petroleum products that is acknowledged to shoot up inflation in India - signaling a strong impact in Nepal as well. Since the Nepali financial authorities are already facing difficulties in containing the double-digit inflation, the possible repercussions of the Indian budget might be a woe for the Nepal Rastra Bank. The Indian Budget has raised duty on petroleum products and gold. This will also have an effect on Nepal’s import tariff regime and the control of unauthorized trade. The increase in import duty on gold, which made gold dearer in India, has further widened tariff differences — a factor which gold dealers said will surely spur smuggling of the metal from Nepal to India. At a time when value of gold’s import stands well over country’s overall exports, the widening of duty gap is feared to aggravate the problem for the Ministry of Finance leaving it with no option but to adjust duty to bring it in line with India’s. To face the situation, Nepal has increased the duty on gold import which gold dealers say makes gold negligibly cheaper than that in the Indian market. While doing so, the agreement to control the unauthorized trade between Nepal and India will have crucial importance. The tough choice for Nepal will have to be made on petroleum products, particularly petrol and diesel. The concerned officials are of the view that the duty rise on crude oil by about 5 percent and petrol and diesel by 7.5 percent and increase in factory gate tax by Rs 1.60 per liter in India will not impact import prices because Nepal enjoys duty-free and bonded supply. Based on the recent duty and tax adjustments, India has already increased the prices of petrol by Rs 4.33 and diesel by Rs 4.08 These have made petrol cheaper in Nepal by about Rs 2.50 and diesel by more than Rs 3 per liter. This is a substantial gap and needs to be plugged urgently. However, given the high inflation and recent hike in the price of diesel, officials at the Ministry of Commerce and Supplies fear there will be a strong political resistance to narrow down the price gap. Indian government has revoked 4 percent special additional duty (SAD), a move which will encourage Nepali RMG manufacturers in Nepal. India had imposed the duty since about a year back and it had negatively affected the Nepali RMG sector. Since the SAD has been withdrawn, some businessmen are of the view that Indian importers will soon start to place fresh orders. Nepal Rastra Bank (NRB) in the recent past used to conduct the impact of Indian Budget on Nepal. Similar studies on the impact should be done by the NRB in co-operation and consultation with the private sector and the relevant stakeholders. The suggestions, conclusions and the action measures to be taken are of crucial importance. Since Nepal’s economy is not faring well, the government might have to take the hard decisions depending on the economic and technical fundamentals of the economy. It has been observed that the impact of the economic reform in India has a direct and positive relationship in the economic development of Nepal. The increased growth rate in India has an impact on the increased investment in Nepal and this has been observed in that the demand for the Nepalese goods and services are on the increase. But the lack of development of the infrastructure in the rural areas of Nepal as compared to India, the abolition of the subsidy in agriculture, insufficient development of the agricultural infrastructure, credit facilities and irrigation, the agriculture sector will be affected, thereby, it will not be able to compete with that of India