The US slowdown and its impact on the Indian economy

Ravi Sangal

The US Slowdown



That there is a slowdown in the US economy, is no longer an

issue or a point of debate. However, concerns facing most of us are:

• Why is there a slowdown and how deep is it?
• What is going to be the impact on the Indian economy and on the Indian IT
  
  market?

First, let us try and understand the reason for the slowdown

of the US economy. There are two possibilities:

Possibility I: The US economy had been on a

high growth path for almost a decade now; a correction was very much in the

offing. Continued high growths over long periods also lead to inventory

build-ups and imbalances among different industries. Such imbalances require

corrections from time to time. Such a scenario is not too unusual and occurs at

least every 3-4 years. Typical corrective action is to reduce the interest

rates, so that consumers start spending again, leading to the revival of the

economy. With funds which become more attractive, investments restart. It is

generally observed that economy starts rebounding in 10-12 months.

Possibility II: Under the second possibility, the US

economy has slowed down because there has been heavy investments and very high

capacity build-ups. While investments have been made and huge capacities have

been created in almost all sectors of the economy, particularly IT and telecom,

enough demand is just not there. In such a scenario, correction really means

industry consolidation and a long waiting period, so that the demand can again

build up and a balance between demand and supply can be reached. Correction time

is longer than what is observed under the first possibility and can easily last

3-4 years or even longer.

It is difficult to pinpoint exactly which scenario is at

play. While the second possibility cannot be ruled out, rebounding of NASDAQ

during the last week appears to indicate that perhaps the US slowdown is not so

bad and it is the first possibility that is at play.

Impact on the Indian Economy



If we discount for some time, the sentiment or the rub-off
effects of the US slowdown, the impact is not really going to be much on India.

The slowdown really has two implications for India- decline in exports from

India and a decline in US investments to India.

• Compared to many other Asian economies such as Korea, Indian economy is
  
  not so much globalized from the point of view of total exports as a
  
  percentage of GDP. India's export as a percentage of GDP is less than 10%.
  
  And if we add to it that only about one-fourth of our exports is to the US,
  
  we are really saying that the US slowdown will not affect our total exports
  
  very significantly. With rupee devaluation, which has already taken place,
  
  exports growth rate may come down from 17% in 2001-02 to 12-13% in the
  
  current year.

The growth of software exports from India would definitely

be affected, though the effect is going to be of temporary nature. We expect

the growth rate to come down to 20-25% from the projected 50% earlier. The

situation should start improving 2002 onwards.

• Compared to the size of the Indian economy, foreign investments in India
  
  are quite small. There are other factors such as attractiveness of the
  
  investment, infrastructure and bureaucracy, which either impede or drive
  
  foreign investments to a country. The current slow-down may not contribute
  
  very significantly to the slow-down in investments from US.

IDC believes that more than the external factors, it is the

internal factors, which are at play and more relevant to the performance of the

Indian economy.

The industrial growth rate is one such factor and a cause of

concern. The growth rate hit a real low in the month of February 2001 at 0.6%.

Industrial growth rate slowdown has a systemic affect on the consumers' spending

which again affects the industrial growth rate. Considering the patterns in the

last few years, the industrial growth rate is observed to follow a pattern of

alternate peaks and troughs. We believe that the growth rate has already hit a

low and improvement should start taking place. The index should start looking

much better OND 2001 onwards. Overall, we expect the industrial growth rate

index during 2001-02 to be similar to 2000-01 but improve substantially in the

following year.

Under assumption that the monsoon will be normal and the

stock market will not nosedive further, we expect the GDP to grow at almost the

same rate as last year, that is between 6 to 6.2% in 2001-02. In case stock

market crashes, the consumer sentiments are going to be further bruised. Instead

of spending the consumer starts saving which is not going to be too good for the

economy. Assumption also is that the political situation will start improving

and not deteriorate any further.

(In our next update two weeks from now, we will closely examine the impact of

the economy on the various sectors of the Indian IT industry.)