The country could overshoot its annual borrowing target in the 2009/10 fiscal year if more fiscal stimulus is rolled out to revive a slowing economy, and this will put pressure on interest rates, senior officials said on Friday.
Policy advisers also said the economy will fare significantly worse in 2009 than in the previous year, and more doses of fiscal and monetary policy may be needed to boost demand and lift growth.
But Arvind Virmani, the chief economic adviser in the finance ministry, said higher spending by the government may widen the fiscal deficit to 6.5-7 per cent of gross domestic product in 2009/10, compared with the budget target of 5.5 per cent.
"You cannot have an expansion in the fiscal deficit without expansion in the borrowing," he said.
On Thursday, the government said it would sell bonds worth Rs 2.41 lakh crore in the first half of 2009/10, two-thirds of its full-year target, sparking fears of higher supplies and pushing yields to two-week highs.
Reserve Bank of India governor Duvvuri Subbarao said authorities would try to carry out the borrowing programme with little disruption in an already-nervous market, but warned that there was a cost of further fiscal stimulus.
Cabinet Secretary K.M. Chandrasekhar said government finances were already strained and any increase in borrowings would put pressure on interest rates.
"So far as the government is concerned, obviously the fiscal space is limited. More borrowing by government...will mean crowding out borrowing by the private sector and will have adverse impact on interest rates," he said.
Asia's third-largest economy started slowing last year as high borrowing costs and later the global economic downturn started impacting domestic firms.