We’re in the red | india | Hindustan Times
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We’re in the red

Moody’s warning on India’s current account deficit will add to the pessimism among credit rating agencies.

india Updated: Feb 18, 2013 21:32 IST

India’s credit rating woes refuse to go away. Just when the government was breathing easy after Standard & Poor’s and Fitch had piped down their doom-mongering, Moody’s is raising the red flag over the country’s worsening trade balance and rising external debt.

Fitch and S&P in separate statements earlier this month found progress on reforms encouraging enough to push the possibility of a downgrade further away, but said India was by no means out of the woods yet. Both agencies continue to have a negative outlook on the country’s investment-grade ranking till they see the impact of the reforms undertaken since September in growth trends. Moody’s, the third member of the international ratings troika, has been less alarmed by the government’s management of the economy and has retained its stable outlook, but its latest warning is bound to ruffle feathers on Raisina Hill. The government has being working strenuously to avoid “junk” grade and the associated higher cost of foreign capital.

Moody’s take is “since global growth and commodity price trends are unlikely to change significantly in the near term, whether India’s external metrics improve or not will depend on policy efforts to limit the fiscal slippage and inflationary pressures that have contributed to external balances deteriorating”. In essence, Moody’s is warning of the perils the fast-growing tiger economies of Southeast Asia faced in the mid-1990s. Although India has not been borrowing abroad on that scale — its foreign debt doubled to $365 billion since 2006 as the current account deficit climbed from 1% of the gross domestic product (GDP) to above 5% — it is heading in the general direction of the Asian crisis. An extension of this argument would require India to substitute foreign debt, now at 22 of GDP, with foreign equity.

Foreign investment cannot be kept at bay in an economy that runs up persistent trade deficits because it imports most of its energy, a point conceded by Indian policy-makers.