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 per cent 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 per cent in 2008/09, its weakest pace in the last six years and lower than 9 per cent of previous three years.
Policymakers expect the economy to grow 7 per cent 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.
Finance Minister Pranab Mukherjee has said India may take more steps to make cheaper and adequate funds available to the private sector, while ensuring the borrowing proceeds smoothly.
On Tuesday, Mukherjee said the government had no intention of monetising debt being issued to fund its fiscal deficit, and was aiming at cutting the deficit to 5.5 per cent of GDP by the end of 2010/11, and further to 4 per cent in 2011/12.
"The key thing is we must get out of high deficit mode," Ahluwalia said. "Not easy, but not impossible."
"If we could be sure that the government is serious about bringing about the (fiscal) correction that we are talking about, then I think the instabilities that many other countries have experienced probably are not a serious threat for India," he added.