The Standard & Poor's downgrading has not surprised the market. The refrain among analysts was that the macro-economic indicators are strong enough to rubbish the move notwithstanding the fiscal deficit and government debt size. The gist of their rationale:
First, the positives:
High forex reserves: As per the latest figures published by the Reserve Bank of India (RBI), the country's forex reserves as on July 27 had surged by $1.456 billion to $43.682 billion.
Current account: The country's current account showed a surplus of $772 million in the first three months of the financial year, as against a deficit of $1.160 million during the corresponding period of the previous fiscal.
Liquidity: There is enough liquidity in the system. Bank deposits grew by 5.2 per cent (Rs 50,456 crore) during the first three months of the financial year, as against a 5 per cent increase (Rs 40,561 crore) in the corresponding period of the last fiscal.
Short-term liability: Short-term loans to India have decreased sharply. In the first quarter of the calendar year, short term loan stands at $383 million (negative), as compared to $128 million during the first three months of the last fiscal.
Low interest rates: Interest rates have dropped to historic lows. The 10-year paper yield has declined by more than a percentage point in the financial year so far to 9.32 per cent.
Corporate bond yields declined in a similar fashion. The yield of the five-year 'AAA' rated paper stands at 9.05 per cent.
Low inflation: Inflation rate is veering around a modest 5 per cent. For the week ended July 21, the WPI inflation rate stands at 4.96 per cent, as against 6.60 per cent during the corresponding period last fiscal.
The bad news:
Slow industrial growth: Industrial growth in the current fiscal is at a 4-year low. Year-on-year growth of index of industrial production went down to 1.9 per cent in May.
The slow industrial growth pushed down the non-food credit off-take of the banking industry as it declined by Rs 3,126 crore, as against a gain of Rs 16,485 crore in the corresponding period of the previous fiscal.
Fiscal deficit: Fiscal deficit during the first quarter of the current financial year was at Rs 4,218 crore -- 36 per cent of the budgeted figure of Rs 11,6,314 crore giving rise to the possibility of a major slippage in the fiscal deficit.
Fiscal deficit during the corresponding period of the last financial year was at Rs 25,073 crore (22.5 per cent of gross fiscal deficit during the year).
Poor tax collection: Central government's tax collection fell to Rs 16,835 crore, as against Rs 22,452 crore during the first three months of 2000-01. Non-tax revenue also fell to Rs 4,788 crore from Rs 7,897 crore.
