The government confirmed the country’s worst fears when it reported that its fiscal deficit, or gross borrowings, in 2008-09 would touch 6% of gross domestic product (GDP). However, the finance ministry later disclosed that including the off-budget items, such as fertilizer and petroleum bonds, would push it up to 7.5% of GDP.
This admission comes two days after rating agencies warned against fiscal slippage. This is reminiscent of the crisis days of 1991.
If India’s sovereign rating is downgraded, it will significantly raise the cost of borrowing in global markets—something the government had banked on to ease the domestic credit crunch. The financial meltdown had already reduced these inflows; a rating downgrade will put an end to them altogether.
Excessive government borrowings will not only crowd out private borrowings, but also contradict monetary policy.
Clearly, an immediate response is a prerequisite to prevent an escalation of the problem.