Finance minister Pranab Mukherjee will have to do a delicate balancing act when he presents the first budget of the new government.Hopes are running high that he will stick to the promise he made before the elections— that another round of tax breaks and spending plans will be announced to prevent any further setbacks to economic growth. But then, there is also the need to unveil a clear path back to fiscal sanity. He would do well to pay close attention to a speech made by Reserve Bank of India governor D. Subbarao on Friday in which he warned of the dangers of a very high fiscal deficit that could harm recovery.

So, on the one hand, there is the expectation of raising the fiscal deficit and, on the other, there is the pressure of bringing it back to manageable levels soon. The lack of a fiscal stimulus plan in the new budget will disappoint business lobbies and equity traders. A further deterioration in public finances will worry long-term investors and global lenders, not to mention the credit rating firms that have brought India to the verge of junk status.

Illustration: Jayachandran / Mint

Analyses carried in these columns over the past few months should leave readers in no doubt where we stand on this issue: The large fiscal deficit worries us no end.

In this context, a new research report from Citigroup Global Markets—Out Of The Frying Pan? Fiscal Vulnerability Takes Centre Stage—makes a valid point. The global crisis could now be entering a third stage. The first stage saw countries with financial imbalances such as high indebtedness and leverage suffer. The second stage saw countries with external vulnerabilities, such as large current account deficits funded by?short-term?capital?flows,?come into prominence. Citigroup says that we are on the verge of a third stage: fiscal vulnerability. Here, countries with high debt-to-gross domestic product ratios will be under threat.

India clearly did not suffer from financial frailty. The second stage, too, did not worry us too much, despite a significant external deficit. That is one reason why our policy establishment has been so confident in these uncertain times.

But India cannot be equally sanguine about phase three. The fiscal deficit is too large for comfort. Period. The first Manmohan Singh government was misled by record tax collections during the boom years into throwing fiscal caution to the wind. We hope it does not make the same mistake in the downturn as well.

How should Mukherjee balance stimulus and deficit? Tell us at