India: Current Economic Reforms and its impact on Credit ratings Essay Example

measures so far have not received positive credit ratings.

India's GDP growth forecast for 2012-13 remains stagnant at a rate of 5.5 percent, with no changes from major banks and credit rating agencies. Standard and Poor's has suggested the potential for revising India's credit rating if the country maintains its efforts to decrease fiscal deficit and encourage growth opportunities. Nevertheless, these agencies have also warned that the rating could be downgraded if there is further decline in the political climate. The feeble economic growth, affecting tax receipts, along with subsidies surpassing budgeted limits, are adding to the fiscal deficit and worsening the situation.

The credit rating of a country depends on two main factors: the increase in per capita income, which allows for higher tax collection and faster debt repayment through revenue earnings (rate of repayment), and the economic growth as measured by the country's GDP.

Inflation rate, economic development, and persistent current account deficit all affect the sustainability of foreign debt/GDP.

The current situation necessitates a constant flow of money to maintain growth. Key factors include regulatory quality, rule of law, accountability, and political stability. Foreign Direct Investment (FDI) in different sectors is one method to raise capital by attracting foreign investment into the equity market. Despite limitations, the liquidity shortage and government capacity constraints require liquidity infusion from multiple sources. The recent actions taken by the government have already helped inject liquidity into the system. Moreover, specific industries and sectors demand significant financing.

The airlines industry in the nation, including Kingfisher Airlines and others, is currently facing financial difficulties that require intervention to prevent further decline. However, due to its own fiscal deficit, the government is unable to

provide the necessary funds.

One potential solution involves liberalizing or freezing the government-imposed reservations in these sectors. These reservations were initially implemented to protect domestic investors but are now hindering the infusion of capital into the system.

Therefore, the recent decision permitting 49% foreign direct investment (FDI) in aviation not only provides much-needed capital for airline companies but also enhances operational efficiency by leveraging the investor's global experience.

Furthermore, the association with a foreign brand will assist in projecting a superior brand image for the company. Additionally, the management can take advantage of cheaper foreign markets, thereby improving its operations. The insurance and pension funds sector has also attracted the attention of the government. Currently, India's pension fund market is valued at a?15.4 lakh crore and remains underutilized. This sector requires an additional infusion of a?62000 crore. In fact, despite the thriving Indian economy, this sector is not adequately tapped into. Increasing the FDI limit to the proposed 49% will undoubtedly stimulate more competition in this sector.

This will not only alleviate the Government's burden but also lead to greater returns for recipients and beneficiaries. To oversee pensions and insurance, the Government can establish an Investment Board. Regarding FDI in retail, the Government must consider policies and long-term effects. It is essential for the Government to ensure that the introduction of FDI policies promotes domestic sourcing, enhances local employment, and preserves local kirana stores. FDI in retail will expand the market with numerous choices, fostering competition and lowering prices.

This will also result in a decrease in the control that multiple tiers of intermediaries have on the supply chain, leading to better profits for farmers. The Government should also support

and attract investments in sectors that generate rural employment and provide capital infusion. For example, promoting industries like Khadi, which will boost the sales of Indian fabric in foreign markets. The deregulation of oil prices will protect the Government from fluctuating fuel prices, reducing the subsidies provided by the Government. To reduce fiscal and current deficits, the Government should prioritize spending on capital projects like healthcare, infrastructure, and education.

This will ultimately lead to an economic boost and subsequently increase investor confidence, thereby attracting capital inflow into the country.