FE Editorial : More risky now

Apart from casting doubts over the 12th Plan’s 8% growth figure by saying India’s potential growth rate is 7%, RBI’s Financial Stability Report (FSR) has a lot more bad news. It points to the impossibility of reaching the new 5.3% fiscal deficit without cuts in expenditure, but the macro picture that comes out is that the world is a lot riskier—Europe continues to lurch from one crisis to another and the US fiscal cliff looks very real now—as compared to June when the last FSR was finalised. As a result, India is also a riskier place.

RBI’s stress tests show the banking system will survive even pretty big shocks, but the rising loan losses—gross NPAs have risen sharply to 3.6% at end-September 2012 from 2.9% as at end March 2012—pose a more immediate problem, more so since Basel III norms have to be in place soon. Rising NPAs means the capital adequacy of banks is getting affected, so if a cash-strapped government is not able to infuse the required doses of capital, more banks could end up being downgraded the way SBI was by Moody’s in October 2011—the other option is for PSU banks to slow credit growth. The other concern that the central bank has relates to the high leverage of the corporate sector. So even as industry and government are hopeful that speedy clearances—by the newly-launched Cabinet Committee on Investment—will spur capital expenditure, companies, especially in the infrastructure space, might find

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