The RBI has raised the red flag on the current state of the Indian Economy.

 Almost every number that seems to be announced on the state of the economy lately is bleeding red. And it is only getting worse. Data released by the Reserve Bank of India (RBI) yesterday showed the current state of the Indian economy. And it is not a pretty sight. India's trade position with the rest of the world deteriorated in the March quarter to its worst level in 20 years. The current account deficit (CAD), which is the excess of imports over exports, rose to a dangerous level of 4.5% of the gross domestic product (GDP), from a benign level of 1.3% only a year earlier. For the full fiscal, the CAD stood at 4.2% of GDP, crossing projections of 4%. In FY11, the same stood at 2.7% of the gross domestic product. It has been almost 2 decades since the balance of payments crisis of 1991 where the Indian government was on a brink of default. But, even then these numbers were not so dismal.
A high CAD is a clear indication that a country is living beyond its means and can only fund its consumption with excessive external borrowings. A prime example is the US government, which continues to run a multi-billion dollar deficit till today. The scary part is that India seems to be treading a similar destructive path. India currently has the highest debt to GDP ratio of all the BRIC nations. This currently stands at 68% of GDP, compared to only 25.8% in China.

India also seems to be more vulnerable to external shocks, since its forex reserves have been drawn down and its stock of external debt has increased. Plus, growth in the country has slowed and India is facing pressures of sovereign credit rating downgrades. Now with its report on the state of affairs of the economy, the RBI has raised the red flag, confirming the rating agencies' concerns. But, can the government rise to the challenge? Or will it raise the white flag of surrender?