Indian Economy: Threat of Downgrade Rating

The world economy is reeling under the economic slowdown so as the Indian economy. There are threats for it to get downgrades from various rating agencies in the days to come. The macroeconomic growth has been a big concern.

The global rating agency Standard & Poor has a rating of BBB (Minus) on India. And there are chances of downgrade if Indian economy will be in further dim growth prospects by next couple of years.

Following reasons could be major to avoid any downgrade further:

Fiscal Deficit:
Fiscal Deficit could be the first major reason for such speculations. According to media reports the fiscal deficit of Indian economy for 2012-13 could be 5.5-5.6 per cent of GDP. That is much higher from the 5.1 percent target. But it may be lower than last year’s figure are 5.8 per cent.

For the government it is very hard to keep the fiscal deficit low because of the subsidies on various sectors. In order to avoid and downgrade from rating agencies, the government would look for options to check the fiscal deficit either bringing more economic reforms or borrowing extra fund from the market.

The Union Budget 2013-14 will be present by the finance minister in March 2013. And the budget will give the clear picture of the growth of Indian economy.

High Inflation Rate and Internet rates:

The high inflation rate in India could be the second major concern for the UPA government to address. The annual rate of inflation (WPI) was at 7.45 per cent (provisional) in October 2012, while it was at 7.81 per cent (provisional) in October 2011.

The apex bank, Reserve Bank of India, will review its credit policy on this week, and it may try to adjust the interest rates to tame the high inflation rates keeping the interest of the investors in India.

There might be some changes in the interest rates to boost the liquidity in the market. The apex bank may infuse some more money in to economy to check the high inflation rates.

Economic Reforms & Obstacles:

The Foreign Direct Invest in retail has been through in Parliament last week by voting followed by two days long debate. It shows that the economic reforms could help the economy to stand and face the economic slowdown, but the path is not easy job for the government to act on.

Despite after the getting the nod of the Parliament over the FDI in retail, still the road for reforms not clear for the government which has been facing the opposition over the lobbying matter. The process of the economic reforms may see slow progress as only two years left for the General elections in India that is going to be held in 2014.

Political Scenario:

The current political scenario has been the major concern for the investors to keep their interest up on the stock markets. The coalition politics has been the recent trend in Indian political system for last decade. But for major improvement in the rating, there should be a stable government, which should be free from pressure of any ally to initiate any reforms.

It does not matter which party is going to form the government but the concern is how strong it would be to carry forward the Indian economy further towards growth.

The bottom-line is the growth rate of Indian economy is completely depending upon the government mechanism to check inflation, fiscal deficit, debt burden.

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Measures to check the inflation?

The inflation touches three year high figure mark in India and this is a tough time for the government for immediate check on inflation. The government of India has initiated measures to check the inflation and now the Reserve Bank of India (RBI) to initiated its measures to check the high inflation rate. RBI acts as custodian to the government and is very effective in checking inflation through various measures.

The two factors - demand and supply are essential to study the price mechanism. In the case of inflation - rise in price level caused through these two factors. Lets consider the supply of the inflation, the inflation would a result of excessive increase in money supply in the face of an inelastic supply of goods and services. If the supply does not match the demand of the product, then there would be rise in price. In order to check the supply side inflation the government may plan to maintain the supply of goods and services into the market. However,s considering the current scenario in India, the government has also took measures to maintain the supply intact into the market.

Apart from that, the government of India may also opt measures like - Credit and Monetary Measures, Fiscal Measures and other Physical measures. The main objective of the credit and monetary measures are to check the liquidity and credit flow in the market, RBI is the apex institution to implement these measures. Some of the measures fall under this category like- sale of government securities, change in the bank rates, variance in Statutory Liquidity Ratio(SLR) &Cash Reserve Ratio(CRR), these are controlled by the RBI to check the credit flow during the inflationary pressure.

Under the fiscal measures, the government plans to check the fiscal deficit, change in taxation and may cut the non plan expenditure scheduled by the various ministries. These physical measures includes - control over the price, fixation of prices of agricultural products and maintaining proper public distribution system. The public distribution system is the proper way to check the impact of inflation on the poorer section of the society. As the poorer section of the society would be most affected section due to high rise in prices of essential commodities. These measures would be effective in checking the inflation but not with immediate effect.

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Budget, Inflation and Poor People

The glory of Indian budget is replaced by the current inflation trends. The government of India has set measures to check the inflation rate, which is at 13 month high. The 'Aam Admi' or common man is under the burden of inflation, however the budget has given little relaxation. The attention of the whole nation is shifted towards the trends of inflation and the measures that are being taken to tackle the problem. Inflation is a very sensitive issue in India, it is due to the monetary and fiscal forces but the government would be targeted for the rise in inflation.

No political leader would favour the rise of inflation as they do now want to hurt the middle class and poor families of India. The rise in the price of goods and services will have impact on the household economy of the middle class and poor families. It's more important at this juncture to supply the basic needs of the people at reasonable price. The government of India would change the fiscal measures to check the inflation whereas the Reserve Bank of India could review it credit control measures. The RBI could change the bank rate and cash reserve ration to check the inflation. However, the credit control measures and fiscal measure are very technical in checking the inflation but the government has to protect the interest of common man.

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