RBI calls for fiscal prudence

31 March 2009

Calling for more financial prudence from the centre and state governments, a Reserve Bank of India report says pressure to support India's economy and drive growth during the global turndown could impede efforts to put its fiscal house in order.

"Given the current pressures to maintain growth at a reasonably high level it would not be possible to resume the fiscal correction path after the current financial turmoil," the report on the country's financial sector, released on Monday, said. It added that once the current turmoil had passed, fiscal discipline would need to be reasserted to support growth.

"For the growth momentum to be sustained, it is necessary to return to the path of fiscal prudence by both the central and state governments," the report said. The federal government's finances have suffered in the 2008-09 fiscal year that ends Tuesday, after making solid gains over the past few years, as a slowing economy has hit revenues and increased spending.

The government expects the deficit to widen to six per cent of gross domestic product in 2008-09, more than double its initial estimate. The country's combined deficit, including state deficits and off-budget items such as fuel subsidy costs, is estimated by analysts at around 10 per cent of the GDP.

The six-volume report is a comprehensive review of the country's financial system. It was prepared by an RBI committee formed by the government and central bank in 2006, and was headed by Reserve Bank of India deputy governor Rakesh Mohan.

On a more positive note, the report says the Indian banking system can easily weather a doubling of bad loans or a sudden spike in interest rates that could send bond yields soaring. It also forecast economic growth of 8 per cent in the medium term, concluding that India's banking sector was an ''oasis of stability'' in a battered global financial sector.