Budget may backfire, choke off economic recovery

While governments around the world are trying to spend their way out of recession, India's case is special: its economy has remained relatively robust, inflation risks are higher than elsewhere and credit is growing scarce.

With global oil and commodities prices rising in recent months and adding inflationary pressure, India's central bank could even be forced into raising interest rates before Asia's third-largest economy has recovered fully.

The budget unveiled by the newly re-elected Congress party-led government on Monday poses upside risks to rates in terms of higher yields, as well as to inflation, due to its expansionary stance, said DBS economist Ramya Suryanarayanan.

"The budget has definitely increased those chances, and at a time when the economy needs more spending towards infrastructure for a sustainable recovery. More supplies (of government debt) will crowd that out," she said.

The record $93 billion in borrowing planned to fund a 36 percent spending hike in the 2009/10 budget also risks stifling the flow of credit to businesses and gives banks even more reason to keep lending rates high unless the central bank buys large chunks of the debt, analysts said.