Fiscal prudence won't be easy for India - Ahluwalia

NEW DELHI (Reuters) - India's widening fiscal deficit poses a major challenge and returning to the path of fiscal prudence would not be easy, the deputy chairman of the Planning Commission said.

Last week, the government projected fiscal deficit at 6.8 percent of gross domestic product (GDP) for 2009/10 ending March, its highest level in 16 years, which has to be funded through a record borrowing of 4.51 trillion rupees ($92 billion).

"I think everybody would agree the weakness is really the fiscal deficit. Debt is high although net debt, if you net our foreign exchange reserves, is not as bad as it seems," Montek Singh Ahluwalia told a conference late on Tuesday.

"But there is no doubt that fiscal deficit is way out of line."

A series of stimulus measures through duty cuts and higher spending widened the deficit, forcing the government to borrow heavily since the last quarter of 2008 and that has pressured bond yields.

"I clearly think fiscal stimulus was necessary," Ahluwalia said. "We were facing quite an exceptional downturn in the global economy. So we needed a fiscal stimulus."

High borrowing costs and the global downturn slowed growth in Asia's third-largest economy to 6.7 percent in 2008/09, its weakest pace in the last six years and lower than 9 percent of previous three years.

Policymakers expect the economy to grow 7 percent in 2009/10.

The central bank has cut its key lending rate by 425 basis points since October to boost growth, but analysts say the heavy government borrowing would not let the real interest rates in the economy come down in tandem with the aggressive monetary easing.