The proposed $2-billion (about Rs 10,000 crore) capital infusion by the government in the country's largest lender State Bank of India (SBI) and possible cash infusion in other public sector banks, will likely to force the government borrow more this year and may push up fiscal deficit to about 5.5% of GDP from the budget estimates of 4.6%
Already, the government borrowing this year is set to touch a record Rs 4,70,000 crore and at least 12.5% higher than budget estimates, and will likely go up further, economists tracking the Indian economy said.
This will push up interest rates as banks will have lesser funds to lend to corporations. "We expect India's fiscal deficit to remain high and it would most probably overshoot the budget target of 4.6% of GDP in the current fiscal year. The central government deficit could increase to 5.7% of GDP, if global crude oil price remain high and domestic fuel and fertiliser prices aren't adjusted sufficiently to offset that," said Takahira Ogawa, analyst at global credit rating major Standard and Poor's (S&P).
In February, finance minister Pranab Mukherjee set out a medium-term roadmap to return to fiscal prudence, targetting to reduce fiscal deficit to 3.5% in the next two years.
Economists said in wake of a slowing economy, the medium-term fiscal roadmap will likely to get affected.
"The country is currently reeling under high inflation and slowing growth, which will push the fiscal deficit as a percentage of GDP beyond what the government had budgeted," said Dharmakirti Joshi, chief economist at Crisil.