Widening trade gap credit negative for India: Moody's
and thus demand for imports.
Loose fiscal policy also fuels domestic inflation, which erodes the competitiveness of both export and import-competing sectors, further widening the trade gap.
"Trends in the first two factors are unlikely to turn significantly benign in 2013. Therefore, an improvement in India's trade balance will require a shift to policies to enhance domestic competitiveness," Moody's Sovereign Risk Group Associate Analyst Andrew Schneider said.
Since foreign-currency debt plays a larger role than foreign investment in financing India's trade deficit, the external debt burden has risen to USD 365 billion as of third-quarter 2012 from USD 137 billion in third-quarter of 2006.
"Should the current trend of more rapid growth in debt and import payments than export earnings and non-debt inflows persist, these ratios, and thus India's vulnerability to external shocks, will deteriorate significantly," the rating agency said.
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