India braces for fresh fiscal test India's ruling Congress party faces a crucial test this week as it tries to convince critics and investors of its fiscal credentials after suffering defeats in state elections last week. Economists say Manmohan Singh, the prime minister, and his government, must use Friday's budget to undertake urgent fiscal consolidation to rein in borrowing. Some claim the budget is one of the last opportunities for Mr Singh, 79, to push forward a stalled reform programme. With parliamentary elections two years away and the Congress-led government struggling to manage fractious electoral allies, fears are rising that the government will turn to sops to buy support. Senior business executives, meanwhile, are looking for signs that Pranab Mukherjee, the finance minister, will take measures to spur investment and return the economy to a higher growth trajectory from the 6.1 per cent it recorded in the quarter to the end of December. Many consider a cut in benchmark lending rates by the Reserve Bank of India to be a much-needed trigger for a wave of investment in infrastructure and manufacturing. On Thursday, the RBI holds its latest monetary policy review meeting after taking emergency steps to boost liquidity last week. Chandrajit Banerjee, head of the Confederation of Indian Industry, said the RBI should cut the repo rate - at which the central bank lends to commercial banks - by 50 basis points, on Thursday. A dismal year where India's growth rate declined three percentage points is likely to be highlighted on Thursday when the finance ministry releases its annual Economic Survey, an authoritative account of economic performance. Shankar Acharya, an economist at the Indian Council for Research on International Economic Relations, said the government needed to use this week's budget to re-establish its fiscal credibility and start a growth turnround. He said Mr Mukherjee had no option but to raise taxes to reduce the fiscal deficit to 5 per cent of gross domestic product from the current level of close to 6 per cent. Mr Acharya blamed populist policies, failure to rein in subsidies and a lack of confidence because of policy "flip-flops" as contributing to a sharp decline in growth over the past two and a half years. But he warned of the threat of the budget inflicting greater damage to investor confidence by promoting "disastrous" over-ambitious fiscal targets. [Issuing] low numbers are not enough. We need to have a precise road map," he said. Even Mr Singh has acknowledged that fiscal indiscipline - which led to a severe balance of payments crisis 20 years ago - is one of his biggest fears. Yet some analysts expect his government to produce a "classic" Congress-style budget which aims to please all as the ruling coalition limps towards parliamentary elections. Anand Shanbhag, head of securities at Avendus Securities, a Mumbai-based stockbroker, said that large rises in development or welfare spending would be viewed as heralding early elections as Congress seeks the support of coalition partners. "A defensive, directionless Congress, under siege from coalition partners, may opt for a purely tactical approach to budget-making," said Sanjaya Baru, director for geoeconomics and strategy at the International Institute for Strategic Studies in Delhi and a former adviser to Mr Singh. Mr Baru said Mr Singh and Mr Mukherjee had the leadership qualities to improve on disappointing budgets over the past two years with tougher action. But expectations are low. Mr Mukherjee is expected to miss badly a fiscal deficit target of 4.6 per cent of gross domestic product which was set for this year and does not include spending by India's states. His forecasts have been widely criticised. "It was obvious from the get-go that this was not achievable," said Leif Eskesen, chief economist for India, at HSBC, the global banking group. The underlying growth assumptions were overly optimistic. Including the states" spending, the consolidated fiscal deficit is forecast to hit 9 per cent of GDP, which would trigger higher government borrowing, damage growth by curbing private investment and make the battle against stubborn inflation more difficult.