India's annual Budget on Friday is expected to only marginally increase borrowings thanks to hopes of higher tax revenues from a pick up in industrial activity and spending cuts.

Analysts and dealers surveyed by Reuters forecast the government to set gross market borrowings of Rs 1.45-1.50 trillion for the financial year beginning April 1.

That compares with Rs 1.43 trillion in the current year, which was a hefty 20 per cent jump over the year before.

"The ongoing thrust on parsimonious spending will result in lesser need to borrow," said Siddharth Mathur, fixed income analyst with J P Morgan. "The government will (also) budget some tax buoyancy."

Tax collections during April to January rose 15 per cent from a year earlier, as industries such as cement, automobiles, steel and power thrived on robust demand.

That growth is likely to sustain in the coming year as India's economy, the world's 12th largest, picks up steam after nearly two years of slowdown.

The industrial sector accounts for 27 per cent of gross domestic product, but kicks in about 80 per cent to government revenues. That is because the farm sector is mostly protected from levies while services, which comprise about half of GDP, are only sparingly taxed.

In the April-December period, industrial output rose 5.3 per cent from a year ago compared with 2.5 per cent in 2001.

And reflecting the federal government's comfortable cash position, its overdraft account with the Reserve Bank of India has remained nil for nine straight weeks since mid-December.

Stable borrowings will be good news to jittery bond traders who are concerned that a sharp increase in paper supplies could put pressure on yields.

"Any targeted borrowing of up to Rs 1.50 trillion will not hurt because there are redemptions of Rs 330 billion next year and the rupee's strength will continue," Rajat Kumar, head of trading at Standard Chartered Bank said.

Analysts are also banking on early debt repayments by state governments and an accelerated privatisation programme to reduce the need to borrow more.

"The borrowing target would have been higher but for a Rs 150 billion debt-swap which we expect will take place next year," said Indranil Pan, associate vice president with Kotak Mahindra Capital.

Several state governments are raising Rs 100 billion by next month to swap old loans from the federal government, which could halve their interest costs as yields have dropped to 6.95 per cent from 13-14 per cent.

More swaps are planned for the next two financial years.

But analysts also warn that the government has consistently overshot its borrowing target and failure to close a yawning fiscal deficit could endanger the country's tenuous international rating, already at junk status.

"Backpedaling on economic reforms and fiscal profligacy resulting in sub-optimal growth and rising government debt could lead to a downward adjustment of the local currency rating," Fitch Ratings said earlier this month.