Moody's upgrade may widen trade deficit, impact exports already hit by GST

Since economists predict that the rupee will strengthen as a result of the upgrade, the export segment might find it difficult to grow as a result

While the government cheers India's ratings upgrade by global ratings agency Moody's, the move might further widen the already yawning trade deficit.  

Moody's Investors Services on Friday upgraded India's sovereign ratings from the lowest investment grade to a notch higher, in a vote of confidence in the Narendra Modi-led government's decisions on demonetisation, the introduction of the Goods and Services Tax (GST), and measures to resolve banks' bad asset issue, among other reforms.

This is expected to shore up international investors' confidence, translating into higher levels of foreign direct investment (FDI) into India.

Since economists predict that the rupee will strengthen as a result of this, the export segment – already in a delicate situation owing to demonetisation and the GST regime – might find it difficult to grow as a result. A currency with a lower value has generally benefited exports from a nation while exports are stymied when currencies strengthen in value.

India's trade deficit was a massive $108.5 billion in 2016-17, albeit lower than the $118.71-billion deficit in the previous year.

The Indian rupee strengthened during the early hours of Friday, trading at 64.98 to the US dollar at 3 pm. The currency had closed at Rs 65.32 to the greenback on Thursday. While the stock and bond markets have been buoyed, the currency movement is expected to make the road towards exports growth difficult, said senior trade experts.

So far this year, the rupee has gained 5.1 per cent, while foreign institutional investors have bought $7.97 billion and $22.34 billion in equity and debt, respectively.

Senior economists from ratings agencies based in India mentioned that the rupee had been projected to rise on a sustained footing owing to global conditions. This includes the expectation that the US Federal Reserve would raise interest rates in its next sitting, thereby triggering a flight of capital.

In the first quarter of financial year 2017-18, more than $14.5 billion has flowed into the country, data from the Department of Industrial Policy and Promotion showed.

On the other hand, after witnessing continuous growth for 13 straight months and peaking at more than 25 per cent growth in September, India's exports fell for the first time in October by 1.12 per cent. Despite total imports growing by the slowest pace this calendar year, the trade deficit in October also increased to a 35-month high of $14 billion. It had stood at nearly $9 billion in September and $11.1 billion in the year-ago period.

Exporters have alleged that they are yet to receive refunds on payment of taxes under the GST regime, which is thereby dragging the sector down.

"After paying GST for four months in a row without getting any refunds, small and medium enterprises (SMEs) are at a breaking point. There is an immediate need for remedial measures to prevent further decline in exports. Otherwise, the situation may be worse for November 2017," Ganesh Kumar Gupta, president of the Federation of Indian Export Organizations, said.

Before GST came into force, exports had been exempt from taxes. However, under the new regime, exporters have to pay taxes upfront of realised profits and apply for tax refunds, which come later on.

Gupta added that production has seen a sharp fall across major employment-intensive sectors such as leather and leather products, gems and jewellery, and ready-made garments, among others.

Apart from this, smaller sectors such as handicrafts and carpets, which are more sensitive to tariff and price movements, have remained unstable.