NEW DELHI, March 16 (Reuters) - Indian Finance Minister Pranab Mukherjee was set to present the federal budget to parliament on Friday morning, under pressure to trim the country's fiscal deficit amid cooling economic growth and a crisis of stability for the coalition government.
The government's move on Wednesday to raise railway fares for the first time in eight years sparked an intense backlash from a key coalition ally, further eroding its ability to make politically tough decisions such as raising diesel prices in order to ease its fiscal deficit.
Prime Minister Manmohan Singh's government was already reeling from a dismal showing in recent state elections and more than a year of corruption scandals that have resulted in a policy gridlock.
"I have a feeling they will try and avoid announcing controversial things, but that doesn't mean they are off the table altogether," said Abheek Barua, chief economist at HDFC Bank in New Delhi.
With federal elections set for 2014, the budget a year from now is expected to be laden with populist spending measures. Friday's budget is thus viewed as a last opportunity for Singh's government to roll back a yawning fiscal gap.
India's fiscal deficit for the year that ends this month is expected to exceed the target of 4.6 percent of GDP by more than a percentage point after economic growth slowed, the subsidy bill ballooned on higher oil and commodity prices and weak markets undermined efforts to sell state assets.
In Friday's budget for the year that starts in April, investors were looking for credible deficit reduction targets, with some economists saying roughly 5 percent of GDP is realistic.
The Indian economy is coming to the end of a tough fiscal year that is expected to see growth slow to about 6.9 percent, far below the nearly 9 percent target set in last year's budget.
High inflation forced the central bank to continue raising interest rates even as its counterparts elsewhere turned their focus towards reviving growth. While inflation is no longer near double digits, it rose to 6.95 percent annually in February.
On Thursday, the central bank disappointed market hopes that it would begin cutting interest rates after 13 increases between March 2010 and October 2011, and warned of renewed inflationary risks from high oil prices, a depreciation of the rupee and "fiscal slippage", a reference to the government's deficit.
(Reporting by Tony Munroe; Editing by John Chalmers)