Global credit ratings major Standard & Poor 's (S&P) revising the long-term sovereign rating of the US to 'Negative' from 'Stable' on Monday (overnight for India) is set to benefit India by increasing foreign investment inflows.
Higher inflows of foreign institutional investors (FIIs) would lead to appreciation of the Indian rupee and ease the burden of the ballooning current account deficit (CAD or shortfall of foreign currency inflows vs outflows), in the short term.
On the other hand, the rating revision and S&P's threat to downgrade the world's largest and strongest economy's debt rating if it does not address the issue of a bloating fiscal deficit, is also set to affect India's exports to North America, including that of services, including information technology (IT) exports in the medium term.
S&P assigns ratings to guide investors on the risks involved in buying debt instruments. America's debt level is at an alarming level of Rs 80 for every Rs 100 worth of goods produced per annum in that country.
"The action brings in two kinds of benefits to India. Domestic currency will strengthen leading to higher FII inflows. Higher inflows will also lessen the burden of CAD and stronger rupee will provide a buffer against oil price rise," said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy (NIPFP).
"However, its impact on service exports will be felt in the medium term (one to three years)," Bhanumurthy added. The US government may have to increase taxes to bring in more people under the tax net to curtail its deficit. "This, in turn, may further shrink their disposable incomes and may have an impact on India's exports to North America," said Ramu S. Deora, president of FIEO.
In the post-recession scenario, the US is no longer India's top export destination, which has now been taken over by the Middle East. Last year (2010-11), India exported $19.53 billion worth of goods and services to the US, with imports being $16.97 billion. However, India's exports are picking up pace, with $11.85 billion worth of goods exported to US in the first six months of 2010-11. Main items of exports to the US include diamonds, gems and jewellery, engineering products, apparel and leather among others.
Courtesy: Mail Today