Mumbai: Concerned over impact of rising deficit on the economy, Reserve Bank Deputy Governor Subir Gokarn on Friday said it was imperative for Centre as well as states to follow the path of fiscal prudence.
"The important thing in this year's budget is the commitment to return to the rule-based approach and the current macro-economy is much threatened by fiscal expansion," Gokarn said while speaking at the 14th Annual Conference on Money and Finance organised by Indira Gandhi Institute of Development Research.
He also emphasised the need for fiscal prudence at both the state and national level.
Finance Minister Pranab Mukherjee in his Budget for 2012-13 proposed to bring down the fiscal deficit to 5.1 per cent of the Gross Domestic Product (GDP) from 5.9 per cent in the previous fiscal.
Pointing out that market perceives the state debt as something which is backed by the sovereign, he said, presently states with strong finances pay the same premium as the states with weak financial position.
The debt of the state governments, he said, "is implicitly guaranteed by the sovereign. So with or without a formal guarantee, market perceives that state debt has been fully backed by sovereign".
"States with weak fiscal consolidation don't pay much premium compared to states with strong fiscal conditions," he added.
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