India's budget deficit has breached the government's target for the twelve months to March 2002.

A shortfall in tax revenue due to a slow down in the manufacturing sector appears to have been to blame.

Analysts fear the deficit is likely to widen further because the risk of war with neighbouring Pakistan could dampen investment in the current fiscal year.

The budget deficit came in at 5.9% of gross domestic product (GDP), or 1.362 trillion rupees ($27.75bn; �19.1bn), official figures showed.

Double miss

It exceeded the official target of 5.7% of GDP set out in the parliamentary budget statement in February.

That target had been revised upwards from an earlier forecast of 4.7% of GDP.

Reserve Bank of India governor Bimal Jalan has said the bank is "absolutely confident" of handling any government borrowing needed to fund a military campaign.

Tensions between India and Pakistan over the line of control in the disputed border territory of Kashmir have escalated since an attack on an army camp which killed 31 people last month.

India holds Pakistani-backed Kashmiri rebels responsible and has demanded Pakistan suppress the separatist militias.

Both countries have nuclear weapons. Foreign embassies have urged their nationals to leave the sub-continent and the UN is withdrawing the families of expatriate staff.

Tax troubles

The Organisation of Economic Co-operation and Development (OECD) said on Monday it had decided to postpone a regional conference in Bombay scheduled for mid-June.

But industrial slowdown rather than war caused the budget shortfall in the fiscal year to March 2002, though regional tensions after 11 September pushed up costs for some industries.

Industrial growth fell to 2.7%, little more than half of the 5.0% recorded in the previous fiscal year, leading to lower-than-expected tax revenues.

Net tax revenues were 1,332.85bn rupees, or 93.6% of the target, while other tax revenues also missed their target by about 7bn rupees.

The Bombay Stock Exchange's 30-issue benchmark index closed up 1.13% at 3,161.09 points as investors focused on peace hopes rather than the budget deficit.

The leaders of both India and Pakistan were due to attend a regional security summit in Kazakhstan on Monday where China and Russia will attempt to mediate between them.