"Given the still soft economy, the pressure to provide more stimulus will persist. While this may help in the near term, the sustainability of recovery requires returning to responsible fiscal consolidation," Reserve Bank Governor D Subbarao said.
The fiscal stimulus packages and other measures initiated by the government to mitigate the impact of global financial crisis on the country have led to a sharp rise in expenditure and fiscal deficit, he said.
"The challenge for fiscal policy is to balance immediate support for the economy with a need to get back on track on the medium-term fiscal consolidation process," Subbarao said.
With every percentage point increase in the fiscal deficit, maintaining adequate liquidity in the system becomes that much more difficult, Subbarao said. "Managing this trade off between our short term compulsions and long term sustainability will be one of the big challenges," he said.
