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. 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 2010-11 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.

In search of an S&P upgrade, India got a shock

NEW DELHI (Reuters) - S&P credit analyst Takahira Ogawa listened politely as officials at India's finance ministry made an hour-long pitch for a ratings upgrade, citing economic growth prospects, revenues and their efforts to contain the government's fiscal deficit. At the meeting two weeks ago, officials argued that tax returns were rising and debt levels were on the decline compared to gross domestic product, two officials who were at the meeting told Reuters. Singapore-based Ogawa gave no sign of what he was thinking - and could not immediately be reached for his version of events - but evidently he left unconvinced. On Wednesday, the ratings agency cut its outlook on India's BBB- rating to negative from stable and warned it had a one-in-three chance of losing investment-grade status, sending shockwaves through the ministry. Its decision could raise costs for Indian borrowers and undermine foreign investor confidence in Asia's third-largest economy. "We were not expecting this downgrade," one senior adviser at the ministry said. The misplaced optimism before the cut suggest the finance ministry may be out of touch with opinion among private economists, investors and even the central bank about the faltering economy. But it also reflects the view in New Delhi that India is unfairly saddled with a low sovereign rating. In February, the finance ministry's chief economic adviser Kaushik Basu complained that India's fast growth was not reflected in global agencies' ratings. "In relative terms, India has become a better investment destination," Basu said. As the news broke, top finance ministry officials huddled in their offices, eyes glued to monitors and television screens for signs of an investor exodus from the markets. "The initial reaction was all of us turned on our TV sets to see what is happening in the stock market," the senior adviser at the ministry said. Shares dropped more than 1 percent in the immediate aftermath but recovered to close down 0.33 percent. Finance Minister Pranab Mukherjee's first public comment on the cut - "don't panic" - seemed aimed as much at his own ministry as at the general public. While the shock news was a wake-up call, officials say the best they can do for now is take incremental steps aimed at restoring confidence in the India story.

India has lost some of its shine recently. After growing at an enviable average rate of more than 8 percent annually for the previous five years, it expanded less than 7 percent in the last fiscal year, its slowest pace in three years. The same 2011/12 fiscal year, which ended March 30, saw its current account and fiscal deficits blow out way beyond targets because of a growing bill for subsidies, mainly of fuel, and soaring oil and gold imports. "If we are able to keep our budget targets on track, it would improve our credibility in the market, and may encourage the rating agency to reconsider its decision," said a finance ministry official, who declined to be identified because he was not authorised to speak to the media. The S&P cut added force to an avalanche of criticism about the government's economic management. Earlier this month, Prime Minister Manmohan Singh sat silently as a panel of his peers, including the central bank governor, told him lack of progress on economic reform had left the economy in disturbing shape. "The broader message for everyone in the government is that we need to move a little faster and a little quicker," said Dipak Dasgupta, the finance ministry's top economist. "We might hurry along a little bit given that everyone seems to think that we need to hurry. Fine, so we will do it." WE'RE NOT TUNISIA S&P ratings for India are the lowest for any of the so-called BRICS - Brazil, Russia, India, China and South Africa - grouping of emerging economies that are reshaping global power. Indeed, some analysts speculate that India is at risk of being replaced in the BRICS ranks by Indonesia, whose credit ratings were recently upgraded to investment-grade. S&P's warning effectively says India's rating is at risk of slipping to "junk". Policymakers in India see their country as a superpower-in-the-making after 20 years of fast growth and it clearly rankles with some officials that S&P considers the economy as risky as those of some Central Asian and North African republics. "We made the presentation arguing India's growth prospects, tax-GDP ratio, efforts to fix the fiscal deficit, are quite genuine and deserve better ratings than countries like Tunisia," said an official who was involved in the presentation to S&P. Dasgupta, who recently travelled to Tunisia, also said it was unfair to club India together with an economy in tatters after last year's revolution. The officials reminded Ogawa that India was still growing faster than any other major economy apart from China.

But sceptics say India is politically unable to take major steps to rein in ballooning subsidies, now more than 2 percent of GDP. Private economists also say the government will struggle to rein in its current account and fiscal deficits and revive GDP growth while world energy prices are high, and with a period of election spending looming. PRAY FOR RAIN Everyone from the finance minister to the central bank governor agree the most urgent step is to cut subsidies on fuel, especially diesel, which some officials say will happen in May. But the move is unpopular with the opposition and the government's coalition partners and has long been delayed. Officials said India plans to take incremental steps to support projected growth and trim its fiscal deficit to 5.1 percent in the current year while - as one minister put it - "praying for good rainfalls and stable crude oil prices". One measure likely to take effect soon is a duty on gold imports, likely to be passed in parliament in May and projected to cut gold imports to 1.7 percent of GDP from 2 percent last year. India imported gold and silver worth $60 billion in 2011/12, pushing up the trade deficit to near $185 billion. Officials also tout recent moves to lift exports of sugar, grains and cotton to boost farm growth and foreign exchange, and point to a jump in approvals for infrastructure projects as the prime minister focuses on supply bottlenecks. But hurt by corruption scandals and held back by rebellious coalition partners, it is far from clear that Singh will be able to deliver enough reform to improve perceptions. "The real issue in India is not that the problems are unknown or that the solutions are unclear; it is that solutions are not being implemented," said Rajeev Malik, a senior analyst at CLSA Singapore. "That is unlikely to change substantially."