A quick analysis by thse Associated Chambers of Commerce and Industry of India (Assocham) on the fiscal situation arising out of these twin developments alongwith adverse assessments by international lenders and rating agencies today revealed a possible serious financial disequilibrium.

"The impending financial disequilibrium would need to be stabilised sooner than later, if the negative fallout in term of inflationary pressures, high interest rates and crowding out of private investment is to be kept at bay," assocham president KP Singh said in a statement.

While the government could raise the level of spending, if much of the expenditure flows towards consumption growth it could lead to inflation instead of spurring growth, Singh warned.

Even though monetary authorities have tried to bring down interest rates throughreduction in bank rate and repo rate, to achieve this on a durable basis, government must bring down its fiscal deficit and market borrowings, he added.

Interest rate cuts ahead of a massive government borrowing programme of Rs 80,000 crore might create speculation-driven volatility in the currency markets forcing the government to raise interest rate to stabilise the exchange rate, Assocham chief said.

Such a situation may eventually be more harmful for the industry than the benefits provided by one per cent reduction in interest rates, Singh said.Further, artificial lowering of interest rates might result in funding otherwise uneconomical projects, especially in a recession situation thus leading to more sickness in the industry, the chamber said.

Managing fiscal deficit called for a gradualist strategy, whereby, in the first stage, growth in revenue expenditure, especially interest payments and subsidies would have to be curtailed, while stepping up capital expenditure to accelerate growth,Assocham has suggested.

An ideal situation would be a positive intervention by government in a major infrastructure initiative so as to attract private investment, it said.In the second stage, over the medium run, government should implement a scheme to reduce administrative expenditure by downsizing bureaucracy whereby it could begin withdrawing from most production activities including infrastructure where markets are developed and private investment is forthcoming, the chamber added.