| Why the US Slowdown will impact India ? |
"It will be 70 per cent soft, 30 per cent hard," declared the editor of The Economist, resurrecting a Maoist dictum that there is nothing like `good' and `bad' but only ratios of the two. Hard landing fears of volatility in financial markets, rising inflation, which will lead to a rise in economic slowdown as well as unemployment. Seventy per cent good and 30 per cent bad was an acceptable level of normality for Mao. By that token, the US slowdown will not be a catastrophe, just a normal event for which everyone should be prepared.
So, is India prepared for the slowdown? And with foreign trade accounting for a mere 0.7 per cent of India's national income and the declining share of the United States Direct Investments in our total FDI do we really need to worry? Well definitely YES!
Firstly the United States is India's largest trade partner, source of foreign direct investment and external job opportunities for the Indian middle class. Any slowing of the US economy is likely to hurt India more today than at any time in the past. The fact is that the US is not only India's largest trade partner, but that India has the highest trade surplus with the US and any slowdown in Indian exports to the US is likely to have a larger impact on the trade deficit than a slowdown in trade with European Union or developing Asia. India's trade with the EU and non-Opec developing Asia, our other two major trade partners, is more or less balanced with exports to these markets equal to imports from them. Our huge trade deficit with Opec countries is largely balanced by the trade surplus we enjoy with the United States. Recently published data shows that India's trade surplus with the US has actually increased since India's exports to the US have continued to grow, while its imports from the US have declined. Indian exports to the US have been mainly in the area of consumer durables and these have grown, with the recent growth of the US economy. Thus, while in the first quarter of 2000-01, Indian exports to the US went up by 26 per cent, imports from it were down by 18 per cent. This trade data does not include software exports.
The software segment is another main area
of concern. The US has emerged as the biggest market for Indian software exports. A
slowdown of the US economy will hurt the "new economy" in India since it is
still largely export-dependent and has not yet found a domestic market large enough to
offset any loss in the external market. But analysts and software CEOs argue that in a
slowing economy, jobs are cut and companies invest in automation, so that the demand for
software services and for IT products is likely to increase as the economy slows down.
Also, many US firms may offload work to lower-cost countries like India, especially in the
area of data-processing and office management work, and that this is likely to increase
the demand for new economy services in India rather than hurt them. On the negative side
is the concern that firms tend to put on hold expansion plans and investment in new
projects when there is a fear of a generalised slow down. This is likely to hurt demand
for Indian IT services and products. The final outcome may be a combination of both
factors. But one must realise that most of the companies who service the lower rung areas
of maintenance etc., will not really stand to loose. They may face a squeeze on their
margins but the business will continue.
Another area which will be impacted, will be the capital markets. Today the world markets dance to NASDAQ’s tune. Dr Huang, who has spend 20 years in US and Taiwan, China, to develop and implement a method to track accurately daily financial markets, said at an investment forum early last year that NASDAQ was overheated, would face a correction upto 2800-3000 and the Dow, he stated, would be back to 9600. and global markets would follow US for 20 % correction. His logic was that there is never a bull market before economic softlanding. The bulls must take 20 % or more correction and consolidation reflecting economic slowdown impact on consumer demand and corporate earning decline. Bull markets, according to him, exist under expanding monetary policy. Expectations of higher profits resulted in an unbelievable rally in the equity markets over the last five years. NASDAQ, the technology stock heavy index, rallied from the start of 1995 and increased by a whooping 5.8 times till March last year. Capital market rally resulted in the `wealth effect', which further fueled the economy. Americans saw their investments in equity markets growing dramatically in value. However with this wealth effect wearing off and the risk consciousness rising, we will see a lower deployment of funds to the world equity markets, which are also in a slump at the moment. For the Indian markets, the impact is two fold - firstly, lower funds coming into the market through the FII route and secondly, companies who had planned NASDAQ listings etc. have had to put their plans on hold and this will delay their funds inflow as well as growth plans.
So, we in India, will definitely need to be prepared for some fall out on the slowdown in the US economy and fine tune our corporate and export strategies as the picture develops.
Aru Srivastava
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