Policy Watch: No Panic Buttons. Yet

POLICY WATCH
No Panic Buttons. Yet

The slowdown in the US economy may not have an adverse impact on India after all.

By Ashish Gupta

A soft landing or a hard thud? As the US economic engine begins to run out of steam, that's the million dollar question haunting not only Americans, but people in other countries. For, their economies are linked to the fortunes of Uncle Sam, the purchaser of 20 per cent of total global imports. Asserts Pranab Sen, Advisor, Planning Commission: ''As far as a worldwide downturn goes, the US definitely has first-strike capability.''

And the news isn't good. The US economy's growth in the third quarter or Q3 (July-September, 2000) was down to 2.4 per cent rate against 5.7 per cent in Q3, 1999, and a steep drop from the 5.6 per cent in Q2 of 2000. Things aren't expected to get any better. Doomsday forecasts by American economists expect growth in 2001 to range between less than 1 per cent and 2.5 per cent, with some even expecting the economy to come to a complete standstill in the first half.

Actually, India will be less affected than some other Asian economies. Malaysia, the Philippines, and Thailand, for example, export nearly 10 per cent of their Gross Domestic Product (GDP) to the US. In contrast, India exports only 2 per cent of its GDP to the US.

But there's little room for complacency. After all, the US buys 18.9 per cent of Indian exports, making it the single-largest buyer of Indian products. The top three items are software services ($1.6 billion), gems and jewellery ($534 million) and garments, including accessories ($268 million). What's more, the US accounts for around 10 per cent of India's foreign direct investment (FDI) inflows. Foreign Institutional Investors (FIIs), many of them American, have been driving the Indian stock market for the past year and, through 2000, the Indian stock market has moved in tandem with the NASDAQ. Clearly, there's a lot at stake.

Endangered Exports

For the commerce ministry and exporters, it is clearly nail-biting time. The success story scripted by Indian exports last year came in the wake of a booming American economy. That revival is at stake. B. Bhattacharyya, Dean, Indian Institute of Foreign Trade, points out that if growth in the US economy declines by 2.5 per cent, import growth could drop by around 4 per cent assuming an import inelasticity of 1.5 per cent. ''Since a large part of India's current export growth is coming from the US, the absolute decline in India's exports can be substantial,'' he warns.

The indirect impact could be more severe. A deceleration in the South East Asian economies will hit Indian exports to the region, which account for 10-15 per cent of total exports. Goldman Sachs estimates that Asian export growth will fall to 10.5 per cent in 2001 from 17.5 per cent in 2000. There's also China to watch out for. If China's export of light engineering and consumer goods to the US are affected, cautions Sen, India can become an alternate market and possibly a dumping ground for these products.

Finally, the Indian software industry is expected to take a big knock with a declining growth in tech-spends in the US. That's bad news, considering 60 per cent of Indian software exports are bound for the US.

Muted Optimism

However, the industry itself isn't losing any sleep over this. The slowdown, says Dewang Mehta, president, National Association of Software and Service Companies (NASSCOM), will only force American companies to cut costs and resort to outsourcing. And this, in turn, will help the Indian software companies. Concurs V. Chandrasekharan, CEO of Chennai-based Pentamedia Graphics: ''More and more offshore projects will now be carried out in India because of the lower costs.'' In any case, the US faces a severe shortage of it professionals (a survey last month put the number required at 300,000). Purrs Mehta: ''India will continue to do well in on-site services too.''

There are others who feel there is no need to press the panic button right now. Bibek Debroy, Director, Rajiv Gandhi Institute for Contemporary Studies, will start worrying only if the slowdown continues for more than a year. Most Indian exports, he points out, are in the low-value segments which are price inelastic. A temporary slowdown will only bring down growth rate from the current 20 per cent to around 15 per cent per annum, he argues.

And despite the Sensex doing a tango with the Nasdaq, stockmarket analysts aren't unduly worried. Says Prithvi Haldea, CEO, Praxis Consulting & Information Services: ''The link between the NASDAQ composite index and the Bombay Stock Exchange (BSE) is more sentimental than real.'' Only five Indian companies are listed in the NASDAQ. Also, in the absence of current account convertibility, Indian investors cannot trade in NASDAQ scrips and hence take advantage of the fluctuations of the global market. Still, the Indian markets will remain nervous as long as the US capital market does not stabilise. Explains Haldea: ''The Indian investor is easily influenced by the changes in the global capital market since he has become a daily trader and not a long-term investor.''

Fears that FIIs may be able to garner less funds and that this may depress Indian stockmarkets even further are also misplaced. Even if US investors put less money into mutual funds given the skittishness of the markets, these funds will tap investors in other countries, explains U.R. Bhatt, Director and Chief Investment Officer, Jardine Fleming.

Bhatt, in fact, expects the slowdown to boost FDI from the US. With very few projects taking off in the US, companies there may actually be looking for other destinations for their investment. What could queer the pitch for India, though, is the go-slow on reforms, and procedural hurdles as a result of which projects take time to mature.

So India can breathe easy for the time being. At the same time, it needs to put on some woollens so it doesn't catch the American flu.

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