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India may be forced to cut spending: Moody's Economy.com

Indian policymakers maybe forced to cut down spending despite all the need to do otherwise, says economic analysis provider Moody's Economy.com

business Updated: Feb 24, 2009 19:55 IST

Indian policymakers maybe forced to cut down spending despite all the need to do otherwise, economic analysis provider Moody's Economy.com said on Tuesday.

"With India already sitting on public debt amounting to around 80 per cent of GDP, policymakers may be forced to pull in spending at a time when pump-priming policies are needed," said associate economist Nikhilesh Bhattacharyya at the Moody's arm.

He said although the governments worldwide are announcing large spending measures to ensure their economies face a soft landing amid a sharp global downturn, India is in a slightly awkward fiscal position.

"Ramping up spending could well prove problematic, with revenues likely to wane as the economy slows, pushing the fiscal deficit close to the unsustainable level of FY 2008-2009," Bhattacharyya said in a research note.

A large fiscal deficit could pose problems for the banking sector, he said. Wide funding gap is forcing the government to issue large amounts of debt, pushing up India's risk-free interest rate and depressing price of the government bonds, large volumes of which are held by banks.