India shielded from U.S. downturn, other risks seen

NEW DELHI Thu Sep 6, 2007 2:57pm IST

File photo of employees at a call centre in Bangalore. REUTERS/Sherwin Crasto/Files

File photo of employees at a call centre in Bangalore.

Credit: Reuters/Sherwin Crasto/Files

Related Topics

NEW DELHI (Reuters) - A small reliance on exports means India's economy is shielded from a potential U.S. downturn, but growth could be stunted if current market turbulence is the start of a longer-term reversal in global risk appetite.

Other Asian economies, such as South Korea and Malaysia, are more reliant on exports, leaving them vulnerable if the U.S. crisis sparked by rising defaults in subprime mortgages prompts a major slowdown in the world's biggest economy.

Paradoxically, one of India's biggest export sectors -- its iconic outsourcing industry -- could even benefit if American firms look to the likes of Infosys Technologies Ltd to cut costs during a downturn, analysts say.

"India's global linkages are much weaker than other emerging economies," Tushar Poddar, an analyst at Goldman Sachs, said in a research report.

Poddar estimates a 1.0 percent cut in U.S. expansion would shave 0.25 percent off India's growth, which was a cracking 9.3 percent annual rate in the April-June quarter.

"Thus it is difficult to see any major impact of a subprime-induced U.S. slowdown on India, where the structural growth story remains intact driven by higher productivity and investment," he said in a report.

India's merchandise exports of around $130 billion account for just 13 percent of India's trillion-dollar economy. Only 15 percent of exports were U.S. bound in the fiscal year to the end of March 2007.

India's financial markets seem to bear out the view that the economy has a thicker layer of insulation against a U.S. downturn that some other Asian countries.

India's benchmark stock market is more globalised than the broader economy, analysts say.

Still, after dropping 13 percent from a record level set just before a global wave of subprime-related selling washed through world markets in July and August, it is now just 2 percent off that peak.

The rupee fell 3.6 percent from a nine-year peak, but has recovered to stand only 1.7 percent below the high.

Other regional markets have not fared so well.

In South Korea, the benchmark stock index dropped more than 19 percent from a July high and now stands 7.5 percent below that peak.

Malaysia's benchmark index dropped 18 percent from its July peak and is now 7 percent off that level.

VITAL STATISTICS

India's outsourcing sector, which caters to the back-office operations of international firms such as Wall Street banks, earns most of its revenues from U.S. contracts.

Some firms catering to the U.S. mortgage market have felt the subprime turbulence, but others, like Infosys Technologies see opportunities.

Last week, Infosys, the second-largest software services exporter, said that after an initial hiatus as clients worked out what the credit crunch meant, outsourcing and offshoring business would gain as customers looked to cut costs.

India's IT and IT services exports were $31.4 billion in 2006/07.

India's main growth drivers are services and manufacturing, backed by rising demand from growing middle class in the 1.1 billion population.

An investment rate of around 35 percent of GDP has sustained industrial output, and a savings rate of nearly 34 percent suggests there are ample funds for long-term investments.

"Except to the extent that rising risk perceptions affect foreign investors' appetite to invest in India, there does not seem to be any other major mechanism by which U.S. subprime difficulties would negatively impact Indian economic prospects," said Saumitra Chaudhuri, a member of Prime Minister Manmohan Singh's Economic Advisory Council.

FOREIGN MONEY

But Morgan Stanley economist Chetan Ahya says if risk aversion continues for 9-12 months, it may hurt growth.

Writing in the Economic Times, Ahya said India's acceleration in growth stemmed from a rise in global risk appetite. This had boosted foreign inflows, which led to lower real interest rates and strong credit-driven growth.

While expecting a soft landing in India's consumption and capital expenditure cycle, he said if the market turbulence was just the start of a reversal in global risk appetite, it could reduce India's access to risk capital and push up funding costs.

Not only that, India's current account deficit made it more reliant on capital inflows than other Asian economies.

Central bank data shows foreign direct investment (FDI) inflows were a record in 2006/07 at $19.5 billion, more than double a year earlier even if it lags China's FDI rate of some $1 billion a week.

And while the fiscal deficit has fallen as a percentage of GDP, this was due to a rise in tax revenues rather than spending reforms, which meant public finances had little flexibility to increase debt aggressively to offset a sharp slowdown in growth.

"We believe that in the event of a sharp risk aversion in the global financial markets and/or a global hard landing, India's growth is far more vulnerable than the rest of Asia," Ahya said.

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

Market Eye

Sensex, Nifty rise to second consecutive record high

Sensex, Nifty rise to second consecutive record high

The BSE Sensex and Nifty on Friday rose to their second consecutive record highs. The 30-share Sensex surged as much as 1.3 percent to an all-time high of 27,706.80. The broader Nifty gained as much as 1.28 percent to a record of 8,275.15.  Full Article 

REUTERS SHOWCASE

Cost Cutting

Cost Cutting

PM Narendra Modi boots officials out of the first class cabin  Full Article 

Airtel Profit Jumps

Airtel Profit Jumps

Bharti Q2 net profit more than doubles   Full Article 

Leisure Riding

Leisure Riding

Harley-Davidson woos affluent young Indians with bike culture  Full Article 

Maruti Earnings

Maruti Earnings

Maruti Suzuki net profit up 29 percent, beats estimates.  Full Article 

ICICI Results

ICICI Results

ICICI Bank Q2 profit up 15 percent, beats estimates.  Full Article 

Moody's on India

Moody's on India

Moody's welcomes India's policy steps, but wants to see more.  Full Article 

End Of QE

End Of QE

U.S. Fed ends bond buying, exhibits confidence in U.S. recovery.  Full Article 

Cook Comes Out

Cook Comes Out

Apple's Cook: "I'm proud to be gay"  Full Article 

Refining Margins

Refining Margins

BPCL aims to double refining margins with refinery expansion.  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage