Mumbai : Anything less than a strong show of deficit-slashing intent in the Budget, to be unveiled on February 26, is likely to disappoint investors.

With its economy booming anew, India is well-positioned to wean itself from aggressive deficit spending that risks driving up funding costs, crowding out private borrowing and scaring away overseas investment desperately needed to fund infrastructure.

"If you can't do fiscal consolidation when the economy is strong, when can you do it? This is the time to do it," Stephen Roach, Asia chairman of Morgan Stanley, said recently in Mumbai.

Finance Minister Pranab Mukherjee is widely expected to initiate a gradual pullback of stimulus measures when he unveils the budget for the next financial year on February 26, but will stop short of curtailing spending or borrowing.

Instead, Mukherjee will hope accelerating growth, improved tax receipts and the sale of government assets provide enough new revenue to avoid unpopular spending cuts and yet allow him to lower a deficit poised to hit 6.8 percent of GDP in 2010, which would be a 16-year high.

Inflation approaching double-digits, meanwhile, is expected to prompt the Reserve Bank to raise interest rates by late April, bringing up borrowing costs and adding pressure to cut the deficit.

New Delhi is on track to borrow a record Rs 4.51 trillion ($98 billion) in the current fiscal year, and market expectations are for higher borrowing in the new year, with a Reuters poll forecasting a 2.2 percent pickup.

India has set a target of cutting its fiscal deficit to 5.5 percent of GDP in the new fiscal year, with analysts polled by Reuters forecasting 5.6 percent. Including state-level shortfalls, the total is now roughly 10 percent.

That is by far the highest among the BRIC group of emerging economic powers. China's fiscal deficit is forecast this year to be 2 percent of GDP, while Brazil's will be 1.1 percent and Russia's 3.2 percent, International Monetary Fund data show.

Missing the deficit target or borrowing more than investors expect would send bond yields higher and convey a negative message to markets choking on government debt.