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.)