Fiscal deficit will hurt India’s banking sector: Moody’s

February 24th, 2009 - 2:10 pm ICT by IANS  

New Delhi, Feb 24 (IANS) India’s large fiscal deficit could pose problems for the banking sector, said economic analysis provider Moody’s Tuesday.
“A large fiscal deficit could pose problems for the banking sector, with a wide funding gap forcing the government to issue large amounts of debt, pushing up India’s risk-free interest rate and depressing the price of government bonds, large volumes of which are held by banks,” according to Nikhilesh Bhattacharyya, associate economist at Moody’s

“With India already sitting on public debt amounting to around 80 percent of gross domestic product, policymakers may be forced to pull in spending at a time when pump-priming policies are needed,” Bhattacharyya added.

The economist said although governments the world-over were announcing large spending measures to prop their economies, India was in a “slightly awkward fiscal position”.

“Ramping up spending could well prove problematic, with revenues likely to wane as the economy slows, pushing the fiscal deficit close to the unsustainable level of FY2008-2009,” he said.

“Already facing a large fiscal deficit, India’s policymakers appear to be pushing spending plans to the limit. The Reserve Bank acknowledged that the combined federal and state budget deficit for FY2008-2009 will come close to 10 percent of GDP,” Bhattacharyya added.

According to him, the situation was unlikely to improve markedly in the coming fiscal year.

“However, with property transactions on the wane, revenues are sure to suffer … amid a subdued outlook for the IT sector and weak monsoon rains putting pressure on the rural economy; the deficit estimate may well rise in coming months.”

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