By Rajesh Kumar Singh
NEW DELHI, April 29 (Reuters) - India cannot bear fiscal deficits and resulting market borrowing beyond current levels, Finance Minister Pranab Mukherjee said on Thursday.
India is set to borrow about a record $100 billion in the fiscal year to end-March 2011 to fund its fiscal deficit, which is projected to be 5.5 percent of gross domestic product.
"I do believe that the economy can bear ... the fiscal deficit to (the present) extent, not beyond that," Mukherjee told parliament, referring to a roadmap to cut the fiscal shortfall.
The fiscal deficit and the management of the government's borrowing programme limit the Reserve Bank of India's (RBI) scope to fight inflation that is near 10 percent.
Rating agency Standard and Poor's said on Thursday it could upgrade India's sovereign rating if there was a sustainable improvement in India's fiscal health, combined with a strong macroeconomic environment.
S&P currently has BBB-long-term and A-3 short term credit ratings on India.
India plans to cut its fiscal deficit to 4.8 percent in the fiscal year 2011/12 and then to 4.1 percent in the year after.
Policymakers have said improving India's public finances would make monetary policy-making easier and give the central bank more leeway in fighting inflation.
On Monday, RBI Governor Duvvuri Subbarao said fiscal dominance of monetary policy is a concern and the credibility of the Reserve Bank of India's inflation management depends "critically" on the credibility of fiscal consolidation in New Delhi..
The RBI has raised rates twice since March by a total of 50 basis points and kept open the possibility of further hikes ahead of a scheduled policy review in July, but some analysts see it as behind the curve on taming inflation.
However, K.C. Chakrabarty, one of the central bank deputy governors, said on Thursday he did not see any immediate need for policy action before July.
A Reuters poll conducted after last week's policy review found a narrow majority of economists expect another increase in rates by the end of June, or before the RBI's quarterly review.
Mukherjee said the fiscal situation prevented him from providing major sops to industry, but he gave some tax relief to the construction sector.
He also raised the export duty on iron ore lumps to 15 percent from 10 percent previously. (Additional reporting by C.J. Kuncheria, Abhijit Neogy, Ruchira Singh and Manoj Kumar; editing by Stephen Nisbet)