* Gross borrowing to rise about 1.3 pct to fresh record
* Fiscal deficit in FY 2001/11 at 5.5 pct of GDP
* Bonds reverse early gains on borrowing worries
* Need to review fiscal stimulus, spending - finmin
* Final 2009/10 economic growth may exceed 7.2 pctestimate (Adds details, quotes, updates market moves)
By Abhijit Neogy and Manoj Kumar
NEW DELHI, Feb 26 (Reuters) - India"s government said onFriday it would increase borrowing next year to a new recordlevel, putting pressure on the central bank to be moreaggressive in its monetary tightening this year.
Finance Minister Pranab Mukherjee told parliament thegovernment plans to increase market borrowing by 1.3 percent inhis $239 billion budget, pushing bond prices lower as investorsfeared a flood of fresh debt supply.
Analysts said the borrowing plan cements the likelihoodthat the central bank will raise interest rates at its nextmeeting on April 20 as policymakers scramble to keep surgingfood inflation from spreading to the wider economy and fuelingsocial unrest.
Mukherjee announced plans to hike spending on social andagricultural programmes popular among voters, but moved onlytentatively to cut a fiscal deficit that is worrying investors.
Some market watchers said India had missed a chance to takemore aggressive fiscal measures as Asia"s third-largest economygathers speed, reinforcing perceptions that the coalitiongovernment may not have the heart to make tough decisions aboutliberalising the economy.
"Given that the fiscal stimulus withdrawal was not strong,the Reserve Bank of India (RBI) may have to be more aggressivein its policy tightening," said Robert Prior-Wandesforde, HSBCsenior Asian economist in Singapore.
The budget focused on keeping the economic recovery robust,but there was little mention of reforms, such as freeing statefuel and food subsidies, that investors say could help Indiarival China"s years of double-digit growth rates.
Some heavy economic stimulus spending brought in last yearwas trimmed, but not chopped.
"The first challenge before us is to quickly revert to thehigh GDP growth path of 9 percent," Mukherjee told parliament.
The 74-year-old minister is known for deftly appeasingIndia"s myriad of caste and ethnic groups rather than pushingvisionary reforms. The decision to spend more on agriculture inparticular is bound to please a key rural support base thathelped re-elect the Congress-led government last year.
But financial markets focused on whether the governmentwould pay more than lip service to imposing fiscal disciplineand start weaning itself off aggressive deficit spending thatrisks pushing up companies" borrowing costs.
Gross borrowing for the new fiscal year will total 4.57trillion rupees ($99 billion), slightly below a Reuters pollforecast for 4.61 trillion rupees but above a record 4.51trillion rupees expected in the current year ending in March,Mukherjee said.
For highlights of the Indian budget, click [nINBUDGET]
RATE HIKES AHEAD
"With the fiscal deficit expected to be still high over thenext fiscal year, it is clear that the onus will be on the RBIto hike rates in coming months in order to move policy settingscloser to neutral and to deal with emerging inflationpressures," said Brian Jackson, strategist at Royal Bank ofCanada.
Mukherjee said the fiscal deficit will decline to 5.5percent of GDP in the new year, from 6.9 percent this year,slightly lower than a Reuters poll forecast of 5.6 percent. Thedeficit figure was slightly better than forecasts and in linewith government expectations.
Total spending will rise nearly 9 percent in the nextfiscal year, while revenues will rise nearly 18 percent as theeconomy recovers. In the previous 2009/10 budget, spendingjumped 36 percent as the government tried to shield thetrillion dollar economy from the global downdraft.
The lingering effects of the economic slowdown could stillbe seen in the latest data on Friday. India"s economy grew 6percent in the December quarter, short of a Reuters pollforecast of 6.8 percent, as farm output fell 2.8 percent.
Some analysts believe the slowdown in spending growth mayhelp ease inflation. High food prices have helped push broaderinflation to what some economists expect could hit 10 percentnext month.
Opposition lawmakers boycotted much of the budget session,saying government plans to increase fuel prices would furtheradd to the woes of millions of Indians hit by high prices. With voters unhappy about inflation, Mukherjee is counting onsurging economic growth as well as higher revenues from salesof government company stakes and 3G mobile licences toforestall the need for even more politically unpopular spendingcuts.
The finance ministry forecasts the economy will grow by 8.5percent in the next fiscal year, exceeding the 8 percentforecast in a Reuters poll of economists in late January.
The yield on benchmark 10-year government bond fell as muchas 6 basis points earlier on Friday on the lower-than-forecastDecember quarter GDP figures, but erased that move on worriesover high government borrowing.
By mid-afternoon, the bonds were yielding 7.87 percent, upfrom 7.83 percent on Thursday.
Stocks .BSESN ended 1 percent higher after Mukhjereeannounced several measures aimed at increasing domesticconsumption. (US$1=46.285 rupees) (Reporting by Abhijit Neogy, Manoj Kumar, C.J. Kuncheria,Bappa Majumdar, Rajesh Kumar Singh, Jeanette Rodrigues andSuvashree Dey Choudhury; Writing by Tony Munroe; Editing byAlistair Scrutton and Kim Coghill)
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