After two long months, Rafeeque Ahmad is finally beginning to breathe easy. The unexpectedly quick end to the war in Iraq has meant that the Chairman of the Chennai-based Farida Group, which exports shoes and leather garments to the US and the European Union, can cast aside worries of market paralysis and increase in freight rates and insurance costs. Just the same Ahmad, who is also the President of the 6,000-strong apex exporters association, FIEO, isn't pulling out the bubbly yet. Why? "We are now concerned about the after-effects of the war. Customers in Europe and the US are buying much more cautiously than before," says the 55-year-old.

It's not just leather-exporters like Ahmad who are worried about the softening in world trade. Other industries too-including it, textiles, pharma, gems and jewellery and chemicals-are fearful of their growth slowing. For corporate India, which was expecting a pick up in 2003-04, things may actually get worse before they get any better. In its recent World Economic Outlook report, the International Monetary Fund (IMF) has scaled down its projection for global economic growth from 3.7 per cent to 3.2 per cent. That may be just half a percentage point, but in terms of dollars it works out to a staggering $1,400 billion.

So the question is, why is the global economy, despite the quick and decisive win in the Gulf, lumbering? The answer, once again, has to do with the US. For the last 12 years, ever since the world's second-biggest economy, Japan, entered its deflationary vortex, it is the American consumer who has been driving the global growth. By continuing to buy clothes, cars and houses through slowdown in other parts of the world-especially s-e Asia and Europe-Uncle Sam ensured that the supplier countries managed to greatly make up for the slowdown in their own domestic markets.

"The big concern is the uncertainty and the long-term consequences of war" Kiran Karnik, President, Nasscom

But since 2001, the US has been battling recession. The demand for consumer goods and housing, two major drivers of its economy, could now be softening. Morgan Stanley, for instance, has warned in a recent report that the consumer confidence is near shattering. The last straw? "It's hard to say," says the report, "(it could be any) a spike in oil prices, a surge in white-collar layoffs, or a deflation of the property bubble... but it could send a wake-up call to the overly-extended American consumer." Surprisingly enough, not too many disagree with the Wall Street firm's dire predictions. Says a Mumbai-based investment banker, who wouldn't be named: "We have already seen three major bubble bursts in the last three years-the stock bubble on Nasdaq, the internet bubble, and the telecom bubble. And now we are witnessing the bursting of the dollar bubble."

For the US, that could bring about what many economists have long been predicting-a double-dip recession: a weak recovery followed by another recession. In its report, the IMF has called for a "greater sense of urgency" in reducing the global dependence on the US, which, it says, has issues of its own to tackle in the coming months. Issues such as a "substantial" budget deficit, a growing current account deficit, and a sharp depreciation of the greenback. It is estimated that the US economy will grow 2.2 per cent this calendar, compared to the 12-nation EU's 1.1 per cent and long-suffering Japan's zero growth.

The Engine Slows

What does an abstemious US mean for the rest of the world? Nothing short of a nightmare. If the dollar weakens, it will make imports that much more expensive for the American consumer. Particularly hurt will be Japan, the EU, Latin America and Eastern Europe, which are already in trouble because of their own nagging structural problems. And because of some relatively new risks such as terorrism and SARS, or the killer flu, which has been claiming lives in s-e Asia and spreading to other parts of the world, the global economy may be more vulnerable than ever before.

The knock-on effect is already being taken for granted. A DSP Merrill Lynch report has revised downwards growth projections for most of s-e Asia's big economies. That of Hong Kong-the most visibly SARS-affected region-from 4.6 per cent to 4 per cent; of Taiwan to 3.2 per cent (3.3); of Singapore to 2.2 per cent (2.4), and of China from 7.6 per cent to 7.5 per cent. Says Surjit S. Bhalla, MD, Oxus Research: "The depression is global today. Its impact is being felt by all-some less and others more."

How about India? Will the combined effect of a weak world economy and SARS halt its plodding run? It is tempting to think that it will not. After all, India has a big domestic market and its exports account for less than 1 per cent of global trade. Besides, the EU, and not the US, is the country's biggest overseas market. In fact, most economists-and not so much corporate India-seem confident of a 5.5 per cent-plus growth this fiscal.

Still, it would be foolish to assume that the country will be left untouched by the recessionary flu. For one, the mere fact that a large part of the world is going through a contraction will impact business sentiment. Investments may be put on hold and expansion plans deferred to favour better utilisation of existing capacities.

In fact, the impact may be greater than most expect. Weaker world markets will straightaway affect what India sells to them-everything from clothes to polished diamonds to software skills to back-office support. While in the nine months to December 31, 2002, exports grew at a better-than-expected rate of 20 per cent, it could grind to a slow in the months to come. "Even the limited war has meant that the current export growth will slow down by three-to-four percentage points," says Ahmad of the exporters' federation.

Among the items most likely to be hit are gems and jewellery (with the demand for gold jewellery being affected in Dubai, one of the largest markets for Indian gold jewellery) and possibly steel, which has found new market in South-East Asia, Far East and China because of the 2008 Olympics. While the war has had a limited impact on steel exports-there's been a rise in shipping costs and prices of imported raw materials-the Chinese government's decision to stop imports temporarily because of its already huge stockpiles has created some uncertainties. Moreover, a lingering SARS epidemic could affect the bottomlines of steel makers like Tata Steel, which exported Rs 96 crore worth of steel to China in the first nine months of last fiscal-12 per cent of its Rs 800 crore exports.

"A good monsoon this year, after last year's drought, is a must to revive sentiments" R. Seshasayee, MD, Ashok Leyland

Even it services, India's strongest export card, could feel the heat. Already industry biggies Infosys and Wipro have sounded the alarm bell on future earnings, citing pressure on pricing. As the IT cake, particularly in the US and Europe, shrivels, the fight will get bloodier and vendors will have to sacrifice margins to retain and snag customers. Says Kiran Karnik, President, Nasscom: "The big concern is the uncertainty and the long-term economic consequences of the war." However, some others like Arun Kumar, President and MD of Hughes Software Systems, believe that Indian vendors could well gain in the long run, as more and more American companies outsource services to lower costs.

May be. But for those dependent on the domestic market, the big issue really is of consumer confidence and income. If SARS, for example, keeps foreign tourists away and the domestic traveller locked in his home, hotels, airlines and ancillary industries will be badly hit. Travel to the Middle East and s-e Asia, which together account for 70 per cent of the outbound traffic, fell by almost 40 per cent in March, compared to the same period last year. Overall, both inbound and outbound travel is down by 35-40 per cent in the period, according to Amadeus, an agency that tracks reservations across airlines. Says Subash Goyal, Chairman, Stic Travels: "If the SARS epidemic continues for another couple of months, then it could spell doom for the entire industry."

Should the rain god play truant, the pall of gloom could spread to other industries, including consumer durables, FMCG, and automobiles. Says R. Seshasayee, Managing Director, Ashok Leyland: "A good monsoon this year, after last year's drought, is a must to revive sentiments and bring about a smart recovery." So far, the forecast from the met department has been optimistic. There's only a 20 per cent chance of a drought this year. Ergo, if the monsoon delivers and rural incomes rise, customers who saved instead of spending last year, could be back in the bazaar. Points out Ravi Sinha, Managing Director, SRF: "The larger issues of monsoon, personal consumption, and fiscal situation are what will drive the outlook for India."

Yet, it is clear that the Indian economy, which was supposed to pick up this fiscal after two dismal years, may no longer do so. That also means more of the 5-per-cent-or-so, stumbling-along rate of growth. Quips O.P. Lohia, Managing Director, Indo Rama: "Another year lost." Maybe 2004-05 will be better.