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Questions over fiscal health

india Updated: Oct 06, 2011 01:22 IST
HT Correspondent
Banking stocks

A question mark loomed over India's fundamentals after global credit rating major Moody's downgraded State Bank of India (SBI), the country's largest lender and often seen as a proxy for the government, this week. Two of the world's top ratings agencies - Standard and Poor's (S&P) and Fitch Ratings - are preparing to review India's sovereign rating next month.

In a slowing economy with concerns linked to less savings and weaker tax revenues, government borrowing this year is set to touch a record Rs 4,70,000 crore - at least 12.5% higher than budget estimates. What this implies is that the government would pull funds away from companies.

Higher borrowing could also widen the fiscal deficit from the budgeted 4.6% of GDP.

"It (SBI downgrade) will have some impact and I am concerned" finance minister Pranab Mukherjee said on Tuesday.

State-owned banks like SBI need more capital from the government - their biggest shareholder. Spending on this would mean the Centre would have less elbow room to spend for growth.

"High interest rates and downside risks in the developed countries will impede India's growth momentum in 2011," Dharmakirti Joshi, chief economist at S&P's Indian unit Crisil, said in a report last month, observing that inflation and deficit were key worries.