Moody's said that even after strong capital inflows in recent years, policymakers in India failed to tackle structural deficiencies, such as high govt debt
Moody's today said rising exports will not resolve structural deficiencies such as high government debt that the Indian economy faces.
"Stronger exports won't be a silver bullet for those facing structural financing and trade imbalances. As a result, there is increased pressure on governments and central banks to step up reform," said Moody's Analytics.
India's exports rose 13% in August, the fastest pace in two years, as conditions in overseas markets improved. The trade deficit narrowed to a four month low of $11 billion.
The process of change has begun in India, where the Reserve Bank has instituted new financial market reforms and "shifted" its focus to supporting growth, although the government needs to do more to rein in debt, Moody's said.
"The true test is whether authorities have the will to enact reforms when global financial markets are volatile and investors are notably less tolerant," it added.
Moody's said that even after strong capital inflows in recent years, policymakers in India and Indonesia failed to tackle structural deficiencies such as elevated external and government debt.
"Investor worries about financial risk in India and Indonesia, and the threat of contagion akin to 1997, contributed to a sharp outflow of capital from Asia in June and July," the agency said.
These capital outflows exacerbate current funding issues, it said, adding the Indian rupee and the Indonesian rupiah have depreciated sharply.
The currency decline raised the cost of foreign-denominated debt obligations and higher bond yields have lifted government borrowing costs.
"Although capital outflows have peaked, India and Indonesia must address these structural deficiencies to regain investor confidence," the agency said.
While a pickup in global demand will help emerging markets weather a wave of capital outflows, there may be more pain before gains in places such as India and Indonesia, Moody's said.
History shows domestic demand must shrink to reduce trade imbalances as imports far outweigh exports in these places, it said, adding, "The lift to exports from weaker exchange rates and stronger global demand takes longer to eventuate."
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