India's combined fiscal deficit -- of both the Centre and states--during 2011-12 could be as high as 8.6 per cent of the GDP and any further slippage could risk a credit downgrade and loss of business confidence, says a report.
According to global research firm Macquarie, consolidated fiscal deficit of the country including off-budget items like food, oil and fertiliser is likely to be around 8.6 per cent amid slowing revenue growth and "lack of expenditure management by the government".
Macquarie further warned the country's fiscal deficit already remained high and any further slippage can increase the risk of "credit rating downgrade and loss of business confidence". It said the Indian government needs to adhere to the path of fiscal correction.
"We believe that the government needs to stick to its commitment of fiscal consolidation and curtail expenditure growth to create a room for private investments," the report said.
The overall fiscal deficit in financial year 2010-11, excluding the 3G spectrum receipts stood at 9 per cent, it said.
"This, in an environment of weak global capital markets, could result in higher cost of capital and further crowding out of private investments and thus slower growth," it said.
Moreover, high fiscal deficit is also the main culprit responsible for high inflation, Macquarie said.
Empirical estimates suggest that a 1 per cent increase in level of fiscal deficit could cause about a quarter of a percentage point increase in the WPI.
Inflation has remained above the RBI's comfort zone of 5-5.5 per cent over the last 22 months and has averaged over 9 per cent during this period.
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