India lifts borrowing in budget, bonds hit

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Bond markets reversed earlier gains on worries over the government budget's plans to increase market borrowing, and some watchers said India missed an opportunity to take more aggressive fiscal measures.

Finance Minister Pranab Mukherjee rolled back some tax incentives implemented to help tide the economy through the worst of the global downturn, and outlined plans to bolster agricultural output.

Gross borrowing for the new year will total Rs 4.57 trillion (USD 99 billion), slightly below a Reuters poll forecast for Rs 4.61 trillion and above the expected Rs 4.51 trillion in the current fiscal year.

"The government missed the opportunity of fiscal timing despite growth being on a strong trajectory," said Robert Prior-Wandesforde, HSBC senior Asian economist in Singapore.

"Given that the fiscal stimulus withdrawal was not strong, the Reserve Bank of India may have to be more aggressive in its policy tightening," he said.

The Reserve Bank of India is widely expected to raise interest rates at its next quarterly policy review on April 20.

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

India's economy grew 6% in the December quarter, short of a Reuters poll forecast of 6.8% as farm output fell 2.8%.

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

Expectations for robust economic growth in the new fiscal year will help India reach its deficit target without making tough decisions to cut spending.

"The first challenge before us is to quickly revert to the high GDP growth path of 9%," Mukherjee said in a budget speech to parliament that was interrupted by loud protests from opposition lawmakers.

High food prices have helped push broader inflation to what some economists expect could hit 10% next month.

Mukherjee is counting on surging economic growth, which his ministry forecasts will grow by 8.5% in the next fiscal year, as well as higher revenues from sales of government company stakes and 3G mobile licences to forestall the need for politically unpopular spending cuts.

The government growth target for next year exceeds the 8% forecast in a Reuters poll of economists in late January.

(USD 1= Rs 46.285)