Ms. Indian Economy needs the Sunscreen!

Can anybody remember when the times were not hard, and money not scarce? - Ralph Waldo Emerson. Surely the Sun is out and shining scorching bright but there is a need for precaution or a "sunscreen" to avoid the bad weather being predicted by the global economists.

The World Bank said the slowdown in the US, the world’s largest economy, is being partly offset by the resilience of developing countries, which have powered through four consecutive years of record expansion. After modest growth of 3.3 % in 2008, global output should expand by 3.6% in 2009 as the US economy rebounds, the report said. US economic growth is expected to have slowed to 2.2% in 2007, from 2.9%. The World Bank forecast a 1.9% expansion in 2008, then a rise to 2.3% in 2009.

In the recent tehelka study Will Wall Street’s Flu Make India Sneeze?

The effects of US recession on India are brought to light. “India has become more integrated with the US and the rest of the world, but we have also become more resilient and our growth engines are very strong,” says DK Joshi, principal economist at rating agency Crisil. He believes that India’s strong purchasing power, growing in tandem with rising income levels, could act as a counterfoil to the dip in demand in the US and parts of Europe. Economic Advisory Council (EAC) chairman C Rangarajan also suggests that Indian companies can offset the disadvantage of a US slowdown by focusing on productivity gains and the domestic markets.

Not all experts are sanguine about the Indian economy’s ability to ride out the storm without some serious damage. If the slowdown balloons into a full-scale recession, the adverse impact is obviously going to be more severe. Many economists believe that there could be pressure on capital inflows — despite the fact that Indian markets offer among the highest returns in the world.

DESPITE SOME optimism, others point out that though India may be relatively insulated, sentiment plays a strong role in market behaviour. Negative sentiment, therefore, could adversely impact domestic markets.

In a study released by Goldman Sachs, Can India ride out the US recession storm?, authors Tushar Poddar and Pranjul Bhandari make a case for cautious optimism: “We think that the economy has sufficient internal ballast so that it won’t be blown off course, but it will lose some momentum. In particular, we believe merchandise and software and other services export growth will halve in FY09 due to the global slowdown, with negative implications for employment growth. The structural growth story remains intact and opportunities to invest in one of the more dynamic economies will remain plentiful and, as a result, our equity strategists remain overweight on India.”

While most experts and industry-watchers are either doomsayers or holding out the hope that India will be somewhat battered but safe, , there is a small minority that actually believes that India and other emerging markets might well ride out the storm largely unscathed, much like a champion surfer. What is the possibility that a recession in the US could actually work to India’s advantage? Infosys mentor NR Narayana Murthy is optimistic: he feels that a recession will create opportunities for Indian corporations, including IT companies, emphasizing that a focus on better allocation of money means a greater opportunity for India. Guruswamy categorically feels that a recession in the US will see organisations such as banks cut jobs, which means more BPO operations in countries like India. Kamdar agrees with the possibility that in the long-term, a prolonged recession in the US may well wean Indian industry from its heavy dependence on US markets and capital and push the development of other markets and sources of capital within Asia and across the world. “This diversification could be a good thing for India’s economy,” she says.

Livemint reports that globalization has brought more competitors and more threats. For many companies, the threat of new competitors in low-cost environments is real. Profitability and cost efficiency has become vital, as has customer relationship quality. So, people look to different models. A model that has been vastly adopted by many businesses is outsourcing and offshoring. India clearly has, over a relatively short period of time, demonstrated itself as being the expert in that area.

However, the US recession could “lead to a decline in capital inflows and weaker exports particularly of services. This could affect the capital and current account and put pressure on the balance of payment surplus,” said the S&P report ‘Asia Pacific sovereigns brace themselves for headwinds from US’. The report further pointed out that “economies with a relatively small export sector and a large domestic market, such as India ..., are going to be much less vulnerable to a US recession-induced fall in export demand”.