UPDATE 3-India budget raises borrowing to new record, bonds hit

* Gross borrowing to rise about 1.3 pct to fresh record

* Fiscal deficit in FY 2001/11 at 5.5 pct of GDP

* Bonds reverse early gains on borrowing worries

* Need to review fiscal stimulus, spending – finmin

* Final 2009/10 economic growth may exceed 7.2 pct
estimate
(Adds details, quotes, updates market moves)

By Abhijit Neogy and Manoj Kumar

NEW DELHI, Feb 26 (BestGrowthStock) – India’s government said on
Friday it would increase borrowing next year to a new record
level, putting pressure on the central bank to be more
aggressive in its monetary tightening this year.

Finance Minister Pranab Mukherjee told parliament the
government plans to increase market borrowing by 1.3 percent in
his $239 billion budget, pushing bond prices lower as investors
feared a flood of fresh debt supply.

Analysts said the borrowing plan cements the likelihood
that the central bank will raise interest rates at its next
meeting on April 20 as policymakers scramble to keep surging
food inflation from spreading to the wider economy and fueling
social unrest.

Mukherjee announced plans to hike spending on social and
agricultural programmes popular among voters, but moved only
tentatively to cut a fiscal deficit that is worrying investors.

Some market watchers said India had missed a chance to take
more aggressive fiscal measures as Asia’s third-largest economy
gathers speed, reinforcing perceptions that the coalition
government may not have the heart to make tough decisions about
liberalising the economy.

“Given that the fiscal stimulus withdrawal was not strong,
the Reserve Bank of India (RBI) may have to be more aggressive
in its policy tightening,” said Robert Prior-Wandesforde, HSBC
senior Asian economist in Singapore.

The budget focused on keeping the economic recovery robust,
but there was little mention of reforms, such as freeing state
fuel and food subsidies, that investors say could help India
rival China’s years of double-digit growth rates.

Some heavy economic stimulus spending brought in last year
was trimmed, but not chopped.

“The first challenge before us is to quickly revert to the
high GDP growth path of 9 percent,” Mukherjee told parliament.

The 74-year-old minister is known for deftly appeasing
India’s myriad of caste and ethnic groups rather than pushing
visionary reforms. The decision to spend more on agriculture in
particular is bound to please a key rural support base that
helped re-elect the Congress-led government last year.

But financial markets focused on whether the government
would pay more than lip service to imposing fiscal discipline
and start weaning itself off aggressive deficit spending that
risks pushing up companies’ borrowing costs.

Gross borrowing for the new fiscal year will total 4.57
trillion rupees ($99 billion), slightly below a Reuters poll
forecast for 4.61 trillion rupees but above a record 4.51
trillion rupees expected in the current year ending in March,
Mukherjee said.

For highlights of the Indian budget, click [nINBUDGET]

RATE HIKES AHEAD

“With the fiscal deficit expected to be still high over the
next fiscal year, it is clear that the onus will be on the RBI
to hike rates in coming months in order to move policy settings
closer to neutral and to deal with emerging inflation
pressures,” said Brian Jackson, strategist at Royal Bank of
Canada.

Mukherjee said the fiscal deficit will decline to 5.5
percent of GDP in the new year, from 6.9 percent this year,
slightly lower than a Reuters poll forecast of 5.6 percent. The
deficit figure was slightly better than forecasts and in line
with government expectations.

Total spending will rise nearly 9 percent in the next
fiscal year, while revenues will rise nearly 18 percent as the
economy recovers. In the previous 2009/10 budget, spending
jumped 36 percent as the government tried to shield the
trillion dollar economy from the global downdraft.

The lingering effects of the economic slowdown could still
be seen in the latest data on Friday. India’s economy grew 6
percent in the December quarter, short of a Reuters poll
forecast of 6.8 percent, as farm output fell 2.8 percent.

Some analysts believe the slowdown in spending growth may
help ease inflation. High food prices have helped push broader
inflation to what some economists expect could hit 10 percent
next month.

Opposition lawmakers boycotted much of the budget session,
saying government plans to increase fuel prices would further
add to the woes of millions of Indians hit by high prices.
With voters unhappy about inflation, Mukherjee is counting on
surging economic growth as well as higher revenues from sales
of government company stakes and 3G mobile licences to
forestall the need for even more politically unpopular spending
cuts.

The finance ministry forecasts the economy will grow by 8.5
percent in the next fiscal year, exceeding the 8 percent
forecast in a Reuters poll of economists in late January.

The yield on benchmark 10-year government bond fell as much
as 6 basis points earlier on Friday on the lower-than-forecast
December quarter GDP figures, but erased that move on worries
over high government borrowing.

By mid-afternoon, the bonds were yielding 7.87 percent, up
from 7.83 percent on Thursday.

Stocks (.BSESN: ) ended 1 percent higher after Mukhjeree
announced several measures aimed at increasing domestic
consumption.

Investment Tools
(US$1=46.285 rupees)
(Reporting by Abhijit Neogy, Manoj Kumar, C.J. Kuncheria,
Bappa Majumdar, Rajesh Kumar Singh, Jeanette Rodrigues and
Suvashree Dey Choudhury; Writing by Tony Munroe; Editing by
Alistair Scrutton and Kim Coghill)

UPDATE 3-India budget raises borrowing to new record, bonds hit