A Silver Lining For Software

Surprisingly, the software industry, which is widely expected to be devastated, sounds fairly sanguine. Sujay Chohan, Country Manager (research and advisory)of it research firm Gartner, admits that travel restrictions and possible tighter immigration laws in the US have affected the feel-good factor. But he insists that the sector will not be as badly hit as is being made out. It may not log a 40 per cent growth, but a 25 per cent growth seems certain. The industry is spotting some silver linings. While a downturn in the insurance and banking sectors, two major revenue earners for the it sector, could spell bad news, these industries are expected to be more keen on security issues, which holds tremendous potential for Indian firms. Also, most internet-based projects are being put aside in favour of application integration and maintenance work on current systems and assets. That's good news for the larger Indian firms that earn around 30 per cent of their revenues from these services.

Even as individual sectors suffer, the economy as a whole isn't expected to be maimed by the war. At least not in the short and, perhaps, medium-term. Fortunately, India's domestic market has always acted as a buffer against external shocks.

The effect of individual sectors may be limited. Exports account for only 9 per cent of gross domestic product (GDP). And with only 2.6 million tourist arrivals each year, India's tourism revenues of $3,300 million are almost the same as that of tiny, war-torn Israel which earns $3,200 million. Hotels and restaurants, whose life depends on tourism, account for only 8 per cent of the GDP. Nobody is losing sleep over the possible decline in foreign direct investment (FDI). FDI inflows have been languishing around the $2 billion mark for nearly five years now and account for only 2 per cent of total investment. And from a macroeconomic point of view, argues American Express economist Arjun Mittal, India's financing gap (the money it needs to raise to finance its external deficit) is very small in relation to foreign exchange (forex) reserves.

Nor is the war likely to throw public finances out of kilter immediately. If tax collections slump (they're already down 6 per cent over last year), or expenditure mounts, that will be because of the ongoing slowdown. ''This year's budget will not be affected by the war,'' assures a senior finance ministry official.

India can, perhaps, take heart from a flash survey of CEOs by at-Kearney's Global Business Policy Council in the wake of the September 11 attacks. The US action and future terrorist attacks rank lower than the state of the global economy in influencing investment decisions. Some like Mittal are pinning their hopes on the recession being shallow and short-lived. There's a 60 per cent chance, he says, that aggressive interest rate cuts and strong government spending will result in a US recovery by mid-2002.

The stockmarkets, too, have bounced back after reacting nervously initially. The Bombay Stock Exchange Sensex stumbled to 2,765 points the day after the US bombings started but recovered the very next day. It's now reigning at around 3,000 points, helped by the better-than-expected corporate results for the second quarter of 2001-02. Though only 173 companies have announced results so far, their net profit has grown 15 per cent over the first quarter. Globally, too, the stock markets seem to have discounted the terrorist attacks of September 11, following which indices had taken a major hit.

NASDAQ has been moving in the range of 1,605.95 and 1,671.31 between October 8 and October 19, 2001, while the Dow Jones Industrial average fluctuated between 9,067.94 and 9,204.11.

There's no room for complacency, though. The backward linkages of the tourism industry-employment, consumption of goods and services-are enormous. Warns Pronab Sen, adviser, Planning Commission, ''The ripple effects of a slump in the tourism industry will be felt across a swathe of sectors, especially if domestic tourism doesn't make up for the slack.'' And in the long run, the current account balance could be affected if the slide in exports continues, foreign tourists keep away and the $4 billion-odd remittances from abroad decline.

Things could go terribly awry if the war drags on into the next year and the Indo-Pakistan tinderbox explodes. That will mean diversion of resources to defence expenditure, which has a huge import content. Says Gokarn: ''The defence establishment is very self-contained and there will be no trickle-down effect on the rest of the economy.''

There are other unguided missiles flying around. Oil prices have actually fallen to $21 a barrel from $30 soon after September 11. The oil-producing nations are playing the middle ground right now. But there's no predicting how they'll react to a prolonged war or if there is a strong Islamic upsurge in their countries. Says Confederation of Indian Industry advisor T. K. Bhaumik, ''Oil prices are driven more by politics than economics.'' India imports nearly 70 per cent of its crude requirement and currently has a cushion of only four months' supplies. Each $1 rise in prices will mean a Rs 200 crore increase in the oil pool deficit.

It'll also have an impact on the rupee, which has remained stable at 48 to the dollar though it had shot up to 48.41 immediately after September 11. N. Subramanian, foreign exchange consultant, Mecklai Financial, doesn't see any pressure on the rupee in the immediate future as long as oil prices stay below $ 25 per barrel. Most experts agree, though some feel the event risk is high and the rupee could fall to Rs 50 time and again. Mittal, however, doesn't see that happening, given the $42 billion forex reserves with the Reserve Bank of India. Concurs Gokarn, ''It's a difficult barrier to break and a credible threat against a speculative attack on the rupee.''

Fighting Back

What the war is certainly going to test, in actual combat conditions, is the government's reflexes in responding to crises and planning for the future.

The tourism development task force is one such response. And the DGFT is reworking the medium-term export strategy that was to be unveiled in September, but was put on hold after the World Trade Centre attacks. The strategy, which focused on studying items in the import basket of countries, will now take into account the new post-war economic realities.

But there seems to be little action on insulating India's oil-shortage economy from the vagaries of the market. Says Bhaumik, ''India needs a strong energy policy focussing on extraction of crude, and a combination of spot purchases and long-term purchase contracts.''

It's clear now that the only way to insulate the Indian economy from global crises, without reverting to an autarchic policy, is to strengthen it.

''The economic problem is fundamentally because of unsustainable domestic policies,'' insists a finance ministry official. The reforms of 1991 proved that India can only reform in a crisis. The war provides that rationale. But it's a tougher call this time. In 1991, the linkage between the macro-economic crisis and reforms was crystal clear.

It's difficult to make that intuitive linkage between the war and the second generation of reforms. Says Gokarn, ''A great deal will depend on the political communication of the argument.'' Is our political establishment up to that?

additional reporting by Roshni Jayakar, Ashish Gupta, Swati Prasad and T.R. Vive.

1  |  2   

Issue Contents  Write to us   Subscription   Syndication

INDIA TODAY | INDIA TODAY PLUS | COMPUTERS TODAY | 
THE NEWSPAPER TODAY |  TNT ASTRO |  TEENS TODAY |  CARE TODAY
MUSIC TODAY | ART TODAY

© Living Media India Ltd