US credit rating downgrade may impact India’s IT, gems & jewellery exports: FIEO

The apex organization of Indian exporters has expressed alarm over the downgrading of US Government credit rating from the top level ‘AAA’ to the AA+ category by credit-rating agency Standard & Poor’s (S&P.)

Exports of garments, handicrafts, leather, gems and jewellery and IT are likely to be the most affected, the Federation of Indian Exporters (FIEO) said. Most of India’s $50 billion of IT and services exports end up in the US.

The ‘AAA’ or triple A rating was assigned to US government bonds in 1941. In comparison, Indian government ‘enjoys’ a modes ‘BBB’ rating from the agency. AAA is the top rating, following by AA+, AA, AA-, A+, A, A-, BBB etc. The ratings are used by investors in third countries (such as the Middle East) to determine where they would like to park their excess funds.

The downgrade came days after after the US government seemed about to default on its debt obligations as a result of its ballooning debt and a refusal by the Congress to raise the debt limit.

US Government bonds have been among the most trustworthy instruments for investment since the second World War, when the US replaced Britain as the World’s most stable and powerful economy.

The US has recently fallen from its status of India’s biggest export destination, thanks to higher appetite for Indian goods in the Middle East.

In 2010-11 ,India exported $19.5 billion worth of goods to the US (out of the total of $225 billion) and imported around $17 billion worth of goods.

However, more than half of the $100 billion services (including IT and BPO) and ‘invisible’ foreign exchange earnings are also estimated to have their origins in the US.

India’s exports have been growing at a break-neck speed of around 45% for the first six months of the year. To the US alone, India exported $11.85 billion worth of goods during the first six months of this year. If the trend continues, exports to the US may grow by around 25% this year.

The(FIEO) said it expected the Indian rupee to appreciate against the US dollar, hampering India’s tremendous growth that started a year ago.

“It is certainly not good for Indian exports,” said Ramu Deora, President FIEO, adding that he expected negative impact on India’s exports in third and fourth quarter due to the US situation as well as the debt crisis in Europe.

He also pointed out higher taxation rates may impact the consumption of Indian goods in the US.

“The down grading will lead to further appreciation of rupee against dollar, thereby blunting our competitive edge. More importantly, the US government will have to increase taxes to bring in more people under the tax net to curtail its deficit which will further shrink their disposable incomes and may have an impact on India’s exports to North America,” Deora added.

He urged the Indian government to do something about the crumbling roads and clogged ports of the country, helping ease the movement of goods and reduce exporters’ costs.

It may be noted that, separately, FIEO is trying its best to prevent the government from withdrawing sops for its exporters and tends to be somewhat aggressive in its projections of the negative impact of unforeseen events on Indian exports. The government has wound down most of the export sops put in place during the recession, but many remain.

The other side of the downgrade is that it may encourage more investment to flow to countries like India. India has seen a drop in long-term foreign investment from around $35 billion two years ago to $25 billion last year.

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