The country faces a high risk of stress on the balance of payment (BoP) front because of the higher crude prices, and the only way to stave off the crisis is to cut subsidies by freeing diesel price, investment bank Morgan Stanley said in a report.
"Risk of balance of payments (BoP) stress remains high," the American investment bank warned in a note.
India will remain exposed to slowdown in capital inflows -- which triggers problems on the BoP front -- unless "the government initiates major policy action to cut its spending (including subsidies) and/or international crude oil prices decline sharply", it said.
A slowdown in capital inflows will increase the pressure on the exchange rate, which will raise the cost of capital that will, in turn, end up hurting growth further, it warned.
The note further adds that even if the country avoids a shock on BoP by issuance of sovereign dollar bonds or dollar deposits, bringing down the cost of capital will be difficult unless the fiscal policy is tightened.
The current deficit had shot up to an alarming 4.3% in 2011-12 against 2.3% in the previous fiscal on declining capital inflows and rising trade deficit, which had touched USD 185 billion last fiscal against an export of USD303 billion.
The last time the country had a major BoP crisis was in 1991, which triggered economic reforms.