The last two months have been very bad for the Indian economy with the country appearing to have totally lost its plot. The ‘kolaveri’  among the international investor community has risen to a crescendo with Standard & Poor, the US rating agency downgrading our outlook as negative, we are now at BBB- a step away from a Junk rating. One of their analysts went so far as to suggest that India will be the first of the mighty BRICS to slip into Junk grade status. This week Fitch, a European rating agency downgraded India .Most of the FIIs [Foreign Institutional investor] link their investment strategy to the ratings given by the top international rating agencies like S&P, Moody, Fitch et al. The ratings also affect the interest rates.  If you watch any business TV channel all you will hear, from the very international experts who praised our big market and domestic economy till a few quarters back, is that FIIs are not very upbeat about  India now. What has changed in the past 6 months for India that has made us so repulsive, a supposedly crouching tiger playing catch up with the flying dragon.

Let us look at some of the recent macroeconomic numbers that have queered the pitch for India.

 Gross Domestic Product (GDP) : GDP  measures the value of goods and services produced within the country. For 2011-12 the Government kept reassuring everybody that the ’ laxman rekha’ of 8 % will not be breached when most of the renowned Indian and Foreign experts were putting the figure closer to 7.2 %.

Finally we did 6.6 and what was more disconcerting was the Q4 [Jan-Mar 12] GDP of 5.3, the lowest since 2004.

The reasons are very clear, a massive reduction in capital goods due to slowing infrastructure development and a slowdown in critical industries like mining, gas production and electricity. Mining was booming last year due to illegal mining, Gas production has come down due to problems that Reliance Industries is facing with it’s wells and a lopsided administered pricing which does not incentivise capital spending and electricity generation is hindered by coal shortages and again pricing issues. All these need to be addressed on a war footing if we have to come out of the self inflicted morass that we are in.

Inflation:  WPI [Wholesale Price Index] Inflation rate for April came in at 7.56 % and March WPI inflation was revised to 7.65 % from the initially reported 6.7 %.  Consumer Price Index [CPI] rate was much higher at 10.5 %. RBI bases its monetary policy on WPI .India has always been prone to inflation and has had a very high interest rate over a decade since opening up the economy in 1991. The RBI has always followed a tight monetary policy with the aim of avoiding future inflation. RBI is of the opinion that inflation is due to structural issues which need political will to solve and since this is missing the best way to kill inflation is to slow down growth, make money more expensive, reduce demand and lo and behold prices will come down. The only problem is that by following this diligent policy of high interest rate, growth rate has reduced but the inflation monster is having the last laugh. It is unrelenting and in fact I can wager that it will cross 9 % within the next 2-3 months. This is going to put the RBI in a tight spot.

Industrial Production:  In April India’s industrial production, measured by IIP Index grew just 0.1 % over the previous year. In March 2012 it had in fact plunged to – 3.2 %.

There is a chorus among the corporates that the slowdown is due to high interest rates. This may be partly true. In the late nineties too India had very high interest rates and still we grew at a healthy clip of above 5 %. The primary cause for most of the fall in industrial production is due to a slowdown in infrastructural development caused by indecision and bureaucratic bottlenecks. The slowdown in Europe due to the debt crisis has further crippled exports.  We have to wait and watch if the theory that Indian economy is robust and powered by a strong domestic market and immune to global headwinds will prove true or not. I think it is not reforms that we need but an overhaul of the system to iron out inefficiency, corruption,  multiple levels of checks and ill thought out regulations.     

Fiscal Deficit: When the government revenue does not match its expenditure it has to borrow. Fiscal deficit is the cash the government borrows to service the additional expenditure.  Floundering Greece has a fiscal deficit of 11 %. Germany, one of the strongest global economies has a fiscal deficit of 0.9 %   India comes somewhere in between with a fiscal deficit of 5.9 % for 2011-12 against a target of 4.6%.  We are trying to cap the fiscal deficit at 5.6 % for 2012-13 but it is most likely to overshoot 6 % due  to weakening   industrial production, a disastrous ONGC FPO[Follow on Public Offer] delivering a crushing blow to the disinvestment ambitions and populist policies taking center stage in anticipation of an early election. International Investors attach a lot of importance to Fiscal Deficit and when it worsens they do what every opportunist does. Sell and run.