India's external debt nearly trebles as trade deficit widens - The Times of India COIMBATORE: With the trade deficit increasing, the country's external debt has nearly trebled and has the potential to fuel an already high inflation. The external debt has risen to $365 billion in the third quarter of 2012 from $137 billion during the same period in 2006. "These rising deficits are being financed by increased foreign-currency borrowing, raising India's vulnerability to international financial volatility," Moody's Investors Service, a division of ratings agency Moody's said. "Wider trade deficits can also weaken the currency, raising domestic prices of imported commodities, further fueling India's already high inflation rate," said Atsi Sheth, Vice President - Senior Analyst, Sovereign Risk Group, Moody's Investors Service. Though the country' external debt rose to $206 billion from $94 billion between 1997 and 2007, there was a fall in ratios of debt/foreign exchange reserves and debt/current account receipts. But these ratios have been increasing since 2007, Moody's said. "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," it warned. Merchandise trade deficit widened to $20 billion in January from $17.7 billion in December 2012, official data released last week showed. International ratings agencies view the trend of higher trade and current account deficit as 'credit negative'. The country's trade deficits averaged about $13.5 billion a month in 2011 and $16 billion a month in 2012, up from an average of $9.5 billion a month between 2008 and 2010. The increase in trade deficit over the past two years is largely on account of slowing global growth, which has lowered demand for Indian exports, rising prices of oil and gold, which respectively accounted for about 35% and 10% of the country's merchandise imports during the third quarter of 2012 and loose fiscal policy, Moody's said. Loose fiscal policy stimulates domestic demand, and thus demand for imports, it said. "Loose fiscal policy also fuels domestic inflation, which erodes the competitiveness of both export and import-competing sectors, further widening the trade gap," said Andrew Schneider, Associate Analyst, Sovereign Risk Group, Moody's Investors Service. Slowing exports and firmness in gold and crude oil prices 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 said.