8 reasons why India's future looks bleak

Ratings agency Standard & Poor (S&P) recently downgraded Indias outlook from stable to negative. This comes as no surprise as the macroeconomic indicators have been suggesting that all is not well for the past two years. Yahoo! Finance looks at the factors that contributed to the negative downgrade, and also dissects how the downgrade, can further exacerbate the situation. Text: Nelson Vinod Moses. Pictures: Getty Images

Fiscal deficit: India has not been fiscally prudent and is paying a hefty price for its excesses. After targeting a fiscal deficit 4.6 per cent of gross domestic product (GDP) for this fiscal year it is projected to end the year way off the target, at 5.9 per cent. One of the main reasons for this is not keeping in touch with global economic realities. Global oil prices have risen by 13 per cent, but the ruling coalition government, the UPA has been unable to pass this on to the public because its hands are tied. After a disastrous run at the state elections, any reformatory zeal has been curbed. With an eye the on the 2014 general elections, and a shaky relationship with coalition, who abhor oil price hikes any changes to this is unlikely. This will further aggravate the situation because Indias fiscal credibility will come under the scanner leading to increased external borrowing costs. Global indicators bleak: The global economy is crawling. The US, the worlds largest economy is struggling, the UK has just announced a crippling double-dip recession, the end of the Euro zone crisis is nowhere in sight, and China is dealing with wage increases, pressure to allow its currency appreciate and issues with overcapacity. Sanctions on Iran will also mean that oil prices may spike leading to further economic pressures. Any global crisis means the availability of credit will become tight leading to a squeeze in investments and less borrowing to fund crucial projects for both the government and private sector. GDP down: After a decade of close to double digit growth the India story has started to fade. GDP growth in 2011-12 is expected to be at 7 per cent, the coming financial year also does not suggest a recovery to high growth rates, the International Monetary Fund (IMF) has projected that India will grow at the same tepid 7 per cent in 2012-13 as well. Compare that to the 8.4 per cent blitz in 201011 and it becomes clear that India has let itself down and has not capitalized on its booming potential. Ratings agency Moodys in a report claimed that this was due to uncertain global funding environment, high domestic interest rates and the apparent lack of policy initiatives that can revive business confidence." Inflation: The RBI has chided the government before in the past for living beyond its means and adding to inflationary pressures. Government revenue inflows have not kept pace with its expenditure. High interest rates and increase cost of borrowing abounds. This is a vicious cycle that the government will find very hard to fix. The rate of inflation, last reported in March 2012, hovers close to the dangerous double-digit levels of 9.5 per cent.

Policy paralysis: The fractured verdict in the state elections and increasing pressure from its coalition allies means that the government cannot go ahead with much needed reforms. Tabling of FDI in retail, aviation and other sectors in the parliament has stalled because the ruling UPA has got cold feet and is unable to make any decisions with its back against the wall and facing the prospect of an early election of it refuses to toe the populist line. The much-awaited goods and service tax (GST),

decontrolling of diesel prices, raising railway ticket prices have all been put on the backburner. Not wanting to antagonize the electorate or its coalition allies, expect the UPA to trudge along without making any policy changes that can propel the economy forward.

Subsidy burden: Good politics does not always make for good economics. Indias huge fertilizer and fuel subsidies are a huge burden on the exchequer. Since the UPAs chairperson Sonia Gandi stresses on inclusive growth it has launched a series of schemes like NREGS and the recent RTE which run into thousands of crores and need public funding. PM Manmohan Singh has promised that the subsidy burden will be brought down to 2 per cent of GDP in 2012-13 from the current ten year high of 2.4 percent currently and get the fiscal deficit down to its targeted 5.1 percent of GDP in the year starting April 1, 2012. Considering that cheap diesel and cooking fuel, as well as food and fertilizer subsidies help parties win elections, the government will be hard pressed on making good on its promise.

Depleting foreign exchange reserves: Foreign exchange reserves have been steadily dipping, it declined to $292.92 billion for the week ended April 6, the lowest level in more than two months. To put this in perspective, China has more than $3 trillion of foreign currency in its reserves. Indias forex reserves have seen better days even during the 2008 global economic crisis when it had cash worth $314.1 billion. Forex reserves are essential to Indias economic well being to fund its huge import bill and tide over portfolio investment volatility if any. A word of encouragement, it is nowhere close to the balance of payment crisis that it faced in the dark days of 1991.

Rising dollar: With the Rupee hovering around the 54 mark against the dollar, imports of any kind become dearer. Since we import 70 per cent of our fuel requirements, this is a huge burden that can add billions of dollars to the final bill. Having already become the worlds largest importer of arms India will have to fork out more. If imports become dearer, so does the costs of items other than oil like coal, minerals, fertilizers, medicine and metal. This in turn puts increases to inflationary pressures and also adds to the governments oil subsidy bill.