Budget expected to cut deficit; borrowing a worry

India's annual budget on Friday is expected to slash the deficit as the economy rebounds, but investors were hoping Finance Minister Pranab Mukherjee will also be firm on keeping borrowing in check. Economists polled by Reuters forecast Asia's third-largest economy would cut its fiscal deficit to 5.6 percent of GDP in the year starting April 1, from a target of 6.8 percent in the current year, a 16-year high. Government borrowing was forecast to rise by another 2.2 percent to 4.61 trillion rupees ($99.5 billion), according to the Reuters poll. Indian federal bond yields rose late on Thursday after Planning Commission Deputy Chairman Montek Singh Ahluwalia said strong growth in 2010/11 could absorb higher borrowing, raising concerns that the government may be looking to tap markets for more than had been expected. Calls for fiscal discipline have gained urgency as inflation is forecast by some economists to reach 10 percent in coming weeks as high food prices fuel broader inflation expectations. Finance Minister Mukherjee was expected to count on surging economic growth, which his ministry forecasts will grow by 8.5 percent in the next fiscal year, as well as higher revenues from sales of government company stakes and 3G mobile licences to forestall the need for spending cuts. The government growth target for next year exceeds the 8 percent forecast in a Reuters poll of economists in late January. Mukherjee, scheduled to begin speaking at 11 a.m. (0530 GMT), was expected to unveil gradual measures to roll back fiscal stimulus measures that were implemented to ease the pain of the global downturn, including tax breaks to several sectors. He may also unveil plans to address shortfalls in food production and distribution that have been a key driver of inflation, as well as initiatives to address India's chronic infrastructure deficit.