We are edging towards stagflation, an unwanted situation of high inflation with stagnation. It had occurred in 1929, and we do not want to see it again. But what is the finance minister doing about it?

“India’s fiscal consolidation has been interrupted by a sharp increase in subsidies, populist budget ahead of elections and an increase in public wage bill. If past reductions in government debt ratios – still well above rating peer group medians – are definitively reversed the sovereign’s local currency would likely be downgraded from the current stable outlook”

– Fitch ratings (July 15, 2008)

The above statement has only brought India’s country rating down to BBB-, the lowest one in the investment grade. A far cry from the desired safe bet, India is moving towards a situation that the hedge funds may not come back to India. The UPA government has acted strongly following its populist sentiments. They have increased salaries of babus, subsidized petroleum products and are now even found to buy MPs to keep their position in the parliament. Clearly we have come to a situation where politics has come to survival, the country’s welfare gets a secondary importance.

What can happen in the times to come? In the space of funds from overseas drying up, capital investments will suffer. India’s borrowing capacity will also be affected with the rising risk of investing in the country. Even terror situation doesn’t help. India seems to be a newfound target of the militants. In this juncture, it may not be good news for the India shining story.

But India will remain an attractive growing market. Corporations will spend heavily on marketing, and will take away the Indian money abroad. ADRs and GDRs will also suffer.

The finance minister and the politicians need to wake up to the fact that petty politics will do more harm than good for the country.