Affects of global meltdown
Global economic meltdown has affected almost all countries. Strongest of American, European and Japanese companies are facing severe crisis of liquidity and credit. India is not insulated, either. However, India’s cautious approach towards reforms has saved it from possibly disastrous implications. The truth is, Indian economy is also facing a kind of slowdown. The prime reason being, world trade does not functions in isolation. All the economies are interlinked to each other and any major fluctuation in trade balance and economic conditions causes numerous problems for all other economies.
According to official data, industrial growth in August has plummeted to mere 1.3% compared to the same month in 2007. That definitely is cause of concern for policy makers and industries. This data also raised fear of low GDP growth of India. It is being suspected that, our country will face huge problems in achieving even 7.5% growth rate in this fiscal.
1.3 percent industrial growth is the lowest IIP (index of industrial production) data ever registered since last ten years. April-August industrial growth rate is 4.9% which is also the lowest for the first five months of a financial year in 14-year period except 1998 and 2001. To make matters worst, a member of the PM’s Economic Advisory Council and Director of the National Institute of Public Finance and Policy have confessed that India is going through industrial recession.
Several crucial sectors of Indian economy are likely to face serious problems in coming months. Foremost among them is real estate sector. The demand for houses have reduced significantly and property prices across India has registered 15-20% fall. Things are likely to get worst as another 20 percent drop in prices is quite possible in coming six months. The woes of real estate have spread to construction industry as well. Because of less demand for houses, construction companies are going to suffer big time. Financial services segment is also likely to be a major victim of economic slowdown because of less demand for credit and reduced liquidity in market.
These three segments account for almost one third of services GDP and because of their current and impending plight, attaining 7.5% GDP growth in this current year is quite improbable. Industrial slowdown will also affect transport services. Transport companies are likely to witness drastic fall in their business and profits. Global recession will also lead to less tourists coming to India. That will negatively affect tours and travels industry.
Though no one likes or wants a recession, almost everyone appears (looking at WEF, Davos) reconciled to one in the United States. Meanwhile, politicians continue to downplay any fears of global repercussions, citing decoupling of the United States and other economies as a buffering factor. But what is the reality for countries like India?
It would be naïve to imagine that a recession in the United States would have no impact on India. The United States accounts for one-fourth of the world GDP and any significant slowdown is bound to have reverberations elsewhere. On the other hand, interdependencies between the US economy and emerging economies like India and China has reduced considerably over the last two decades. Thus, the effect may not be as drastic as would have been the case in the 1980s.
Even so, fears of a US recession led to panic in the Indian stock market. January 21 and 22 saw a meltdown with a mind-boggling US$450 billion in market capitalization being vaporized. An unprecedented interest cut by the Fed led to a bounce-back on January 23 and at the time of this writing, the benchmark index (BSE) has gained 2.5%, almost in line with Hang-Seng, Nikkei, and Kospi.
History might hold a clue here. The last time the bubble burst (2001-2002), the DJIA went down by 23%, while the Indian Index fell by 15%
.Much has happened between then and now. The Indian economy has shown a robust and consistent growth trajectory and the projection for 2008 is 9%. Indian exports to the United States account for just over 3% of GDP. India has a healthy trade surplus with the United States.
In other words, the effects of this recession on India may be quite distinct from those of the past. Here are some areas worth following:
- 1. A credit crisis in the United States might lead to a restructuring of asset allocation at pension funds. It has been suggested that CalPERS is likely to shift an additional US$24 billion to its international portfolio. A large portion of this is likely to flow into India and China. If other funds follow suit, a cascading effect can be expected. Along with the already significant dollar funds available, the additional funds could be deployed to create infrastructure--roads, airports, and seaports--and be ready for a rapid takeoff when normalcy is restored.
- 2. In terms of specific sectors, the IT Enabled Services sector may be hit since a majority of Indian IT firms derive 75% or more of their revenues from the United States--a classic case of having put all eggs in one basket. If Fortune 500 companies slash their IT budgets, Indian firms could be adversely affected. Instead of looking at the scenario as a threat, the sector would do well to focus on product innovation (as opposed to merely providing services). If this is done, India can emerge as a major player in the IT products category as well.
- 3. The manufacturing sector has to ramp up scale economies, and improve productivity and operational efficiency, thus lowering prices, if it wishes to offset the loss of revenue from a possible US recession. The demand for appliances, consumer electronics, apparel, and a host of products is huge and can be exploited to advantage by adopting appropriate pricing strategies. Although unlikely, a prolonged recession might see the emergence of new regional groupings--India, China, and Korea?
- 4. The tourism sector could be affected. Now is the time to aggressively promote health tourism. Given the availability of talented professionals, and with a distinct cost advantage, India can be the destination of choice for health tourism.
- 5. A recession in the United States may see the loss of some jobs in India. The concept of Social Security, that has been absent until now, may gain momentum.
- 6. The Indian Rupee has appreciated in relation to the US dollar. Exporters are pushing for government intervention and rate cuts.
What is conveniently forgotten in this debate is that a stronger Rupee would reduce the import bill, and narrow the overall trade deficit. The Indian central bank (Reserve Bank of India) can intervene anytime and cut interest rates, increasing liquidity in the economy, and catalyzing domestic demand. A strong domestic demand would also help in competing globally when the recession is over.
In summary, at the macro-level, a recession in the US may bring down GDP growth, but not by much. At the micro-level, specific sectors could be affected. Innovation now may prove to be the engine for growth when the next boom occurs.
For US firms, who have long looked at China as a better investment destination, this may be a good time to look at India as well. After all,350 million people with purchasing power cannot be ignored. This is not a sales pitch for India, but only a gentle suggestion to US corporations.