New Delhi: India's combined fiscal deficit --of both the Centre and states--during 2011-12 could be as high as 8.6 per cent of the GDP and any further slippage could risk a credit downgrade and loss of business confidence, says a report.

According to global research firm Macquarie, consolidated fiscal deficit of the country including off-budget items like food, oil and fertiliser is likely to be around 8.6 per cent amid slowing revenue growth and "lack of expenditure management by the government".

Macquarie further warned the country's fiscal deficit already remained high and any further slippage can increase the risk of "credit rating downgrade and loss of business confidence". It said the Indian government needs to adhere to the path of fiscal correction.

"We believe that the government needs to stick to its commitment of fiscal consolidation and curtail expenditure growth to create a room for private investments," the report said.

The overall fiscal deficit in financial year 2010-11, excluding the 3G spectrum receipts stood at 9 per cent, it said.

"This, in an environment of weak global capital markets, could result in higher cost of capital and further crowding out of private investments and thus slower growth," it said.

Moreover, high fiscal deficit is also the main culprit responsible for high inflation, Macquarie said.

Empirical estimates suggest that a 1 per cent increase in level of fiscal deficit could cause about a quarter of a percentage point increase in the WPI.

Inflation has remained above the RBI's comfort zone of 5-5.5 per cent over the last 22 months and has averaged over 9 per cent during this period.  As per the report, the states' fiscal deficit, excluding the huge losses of state electricity boards (SEBs), is likely to improve from 2.8 per cent of GDP in FY10 to 2.3 per cent of GDP in FY12.

However, after incorporating the SEBs losses, fiscal deficit of states would widen from 2.3 per cent of GDP to 3 per cent of GDP in FY12, Macquarie said.

India's consolidated fiscal deficit more than doubled from 4.8 per cent of GDP in FY 2008 to 10 per cent of GDP in FY 2009. In FY 2011, it was 9 per cent of GDP if revenue from allocation of telecom licence and Broadband Wireless Access (BWA) spectrum is excluded.

Before the credit crisis, India managed to achieve a consolidated deficit level of 4.8 per cent of GDP in FY08, the lowest in the past two decades, largely owing to buoyant tax collection growth.

 During the credit crisis, the government pursued an expansionary fiscal policy to raise domestic demand and hence there was a slowdown and a widening fiscal deficit, it said.

Besides, populist measures like -- wage hikes for central government employees, pre-election spending, farm loan waivers and expansion of social security schemes like rural employment -- were announced ahead of parliamentary elections in May 2009, further deteriorating the fiscal condition, Macquarie said.