Recession in the United States & Its impact on India

Anand Wadadekar
M.A Economics, MBA Finance, AMFI, DIT, GCIPR
Author | Information Expert
Pune, Maharashtra

This is my Research Article published by Sri Guru Gobind Singh College of Commerce,
UNIVERSITY OF DELHI in their Research Journal "Journal of Business Thought".
RECESSION is a word which when heard gives the emerging countries tremors and
sounds as a scary thing for them. Unfortunately, this time its the most uttered word
in India & looks more dreadful for many considering Indias upward growth
projectory. And therefore everybody seems to be discussing about the American
recessionary signals & its impact on emerging countries, more particularly on India.
INDIA, in the last 2 decades has been seen as one of the strongest & fundamentally
strong emerging countries, thanks to the technological advancement, quality of
education, trained labour and well regulated markets.
THINKERS, business men & the common man on the streets seem to have been
horrified by the very thought of recession in India and that too majorly because of
the recessionary indications the United States is giving. Rising international oil prices,
depreciating dollar & appreciating rupee, inflation, decreasing industrial production,
decreasing job opportunities, cost cutting, reducing purchasing power parity,
reducing demand are some of the major aspects discussed among them through
every possible mode like articles, talks & walks and also in places like washrooms,
canteens, etc.
THERE seems to be a feeling in the whole country and that is reflected in the many
surveys conducted across the country, which suggest that India is surely going to be
impacted by the U.S recession to a great extent, which will put a strong break on its
growth trends.
HOWEVER, the reality may not be this much grave as it has been presented.
Through this article I would like to suggest that India will NOT be impacted largely
by the U.S. recession, simply because India is not what it was in the 1980s-'90s.
Although it will be immature on my part to say that India will not at all be impacted
by the US recession, the truth is that it will not get impacted adversely in the
magnitude of what everyone feels. This time the magnitude of the impact is to be
looked upon and which is important and no generalization should be held true.
THERE is a famous old adage which goes like this, "When the U.S sneezes, the rest
of the world catches cold"! This old adage should not be made applicable in todays
globalisation & open market economy age.
It should be agreed that there are reasons which makes one feel that India will be
adversely impacted by the US recessionary trends. From the American perspective,
there has been sub-prime crises (housing), weakening dollar, banking system in
crises (credit crises), decreasing aggregate demand, weak consumer spending (high
consumer spending which US is famous for) are some of the important ones. Taking
into a/c the size of the American economy and it being one of the major customers
for world products, a slowdown in US is bound to affect other parts of the world.

This creates a panic among people leading to overall negative sentiments which
hampers growth further.
HOWEVER, it is completely incorrect to blatantly comment that all those economic
happenings will take India to recession. Our Finance Minister's statement that "India
has strong fundamentals" is very much correct and not all politically motivated. Our
Central bank, The Reserve Bank of India also has expressed the same thing over and
over again.
INVESTMENTS in any sector or country are done based upon its credit worthiness
and the income generating capability. For emerging country like India, investments
are the most important aspect which the developed countries look for. A KPMG
survey says India is likely to see the highest growth globally in investment in the
manufacturing sector over the next five years as investors shift focus to emerging
economies in the wake of financial turmoil in the US and Europe. About 25% of
global corporates who participated in the survey expected to invest in Indias
manufacturing sector. Investment in industrial goods sector would also be large, with
India expected to displace the US to stand at the second rank after China. As
investments go global, smart money is increasingly finding its way from the
traditional investment destinations of US and Europe to BRIC (Brazil, Russia, India
and China) countries. The recently-recognised India opportunity is reflected in the
fact that a significant amount of investment into India in the next five years is
expected from first-time investors, KPMG India CEO Russell Parera said.
The survey covered over 300 corporate investment strategists from 15 major
economies who were asked where they plan to invest in the next 12 months and in
five years time. The respondents were also asked which countries they saw as
dominant in their sector and which they expected to be dominant in 2013-14.
The survey showed a move away from investments in the US, Japan, Singapore and
the UAE, and an increase in flows to BRIC economies. About 10% of the companies
surveyed expected to invest in India and this number would go up to 18% in five
years.
It is clear that India has the potential to play an even more influencing role in flow
of capital and its a great opportunity for India to further improve the economic and
fiscal climate and proactively attract and retain investments in her growing
economy, said the KPMG survey.
Over the next five years, India will move from seventh to fourth in the investment
league table by overtaking the UK, Germany and France. The US remains the
favorite investment destination for Indian companies. The majority of domestic firms
that responded to the survey expected the bulk of Indian investment this year to go
to the US, while the Middle East, Singapore and Hong Kong will also see substantial
investments from India.
MARTIN Feldstein, Professor of Economics at Harvard University, declared recently
that the United States has already slipped into a deep recession that could be the
most serious since World War II, it shocked many observers. Especially, Mr.
Feldstein also heads the National Bureau of Economic Research, an organisation that
is the official arbiter of when recessions begin in the country. But Mr. Feldstein says
that the impact of a possible slowdown in the US will be very limited on countries like
India and China. This expert on global business cycles also feels that, India is not
just in a cyclical upturn, but has the ability to show high single-digit growth rates for
very long periods of time.

INDIA'S Gross Domestic Product (GDP) Rate is what is much talked about! The
Indian economy has shown a robust and consistent growth trajectory and the
projection for 2008 is 9%. With US in recession, exports may be affected. If the
exports do go down, it will have a negative impact on the GDP. But the question
arises is how much would a recession in US affect Indian economy? Here, it is
important to quantify how big is big and how deep is deep? In other words, how big
and deep is the recession? The main concern right now is that it will affect us
because in this world of international trade, we are dependent on the US also for our
exports and a recession there could lead them to cut their imports and hence our
exports. But how much is India really dependent on them?
The export figures to United States in the year 2006-07, were roughly 14% of the
GDP while total exports of goods and services stood at 27% of the GDP. Out of the
14% (of GDP) worth of goods exported by India, 2.09% (of total exports) were
exports to US, which in turn means that as far as export of goods is concerned, only
2.09% of the GDP is dependent on them. If 27% is total exports out of which 14% is
for goods that means 13% of services were exported. Unfortunately, country-wise
export data of services is not available but we do know that out of a total export
figure of $119 billion, $54.6 billion (45.88%) accounted for export of software and
BPO services. Since the major exports of services to US is in the form of software
and BPO, it means that exports of services to US accounts for roughly 6% (45.88%
of 13%) of the GDP. So, our total export to US is only about 8% of our GDP. Taking
this into consideration, how can a recession in US affect India? Recession in a
country does not mean that all the imports are stopped and this is true for US also.
U.S., at the most, will reduce it to save their spending. To reduce their costs, it may
cut down on imports of manufactured goods. Another way of reducing their spending
would be to outsource some of their jobs. Since both China and India specialize in
providing skilled labour at cheaper rates than America, and since India is an English
speaking country, most of those outsourcing jobs should come to India. So, while the
US imports of goods may go down, the import of services may actually increase.
Even if they reduce their imports of goods from India by a hefty 25%, it would still
affect our GDP by only between 1 and 2%. This means that the growth rate of our
GDP would still be much higher than the top ten countries of the world (except
China).
EXPORTERS are having a hard time and they are crying foul for cut in key lending
rates, but it has been noted that the exporters are not that efficient. They have in
the past enjoyed the benefits of depreciating rupee, so there is a need to be more
innovative & effective. Exporters need to increase their over all efficiency and go for
a systematic cost cutting to balance the rupee effect. Reduced exports due to US
recession will actually make Indian producers & manufacturers turn to domestic
market & serve its own people, and this will ultimately make the domestic market
more lucrative for them. India has a huge population and so a huge consumer base,
so we dont have to always depend on US for our growth. India's GDP is expected to
grow at 8.5-8.9 % which is again way above the growth rate of US and only second
highest in the world after China. After all, 350 million people with purchasing power
cannot be ignored. Besides this, travel & tourism is growing at a better rate
compared to the previous years. Corporate Inc has learnt to allocate capital more
efficiently and to provide exceptional quality service by implementing cost cutting
measures to survive and flourish in the respective sectors.
THE above facts coupled with the interest rate arbitrage between India and the US
leaves no choice with the FIIs than to invest in India. The world economy will
inevitably slow down along with the US.

But countries like India will still be able to attain GDP growth of 7%, lower than the
8.8% of the last four years, but still extremely high by historical standards.
THANKS to the IT & ITES sector which now, has a large & sizeable share in India's
exports. Despite the rising rupee adversely affecting their revenues, business
projections announced by top outsourcing companies remain encouraging. No doubt,
the IT sector will be affected in the short term, but there should be no major reason
to panic for the longer term. In a survey conducted, 90% of Indian CEOs are
confident about growth prospects which give a testimony to that.
ON the contrary, slowdown in US would force US companies to outsource their work
more to countries like India. Indian industry is currently seeing a cut in recruitment
rate, reduced salary hikes, etc. this is surely going to be short-lived. We need to
understand that such recourses may be adopted, but those are nothing but, to avoid
economic & business jerks and it's always better to be careful & safe than being,
careless.
PERFORMANCE of stock markets should not be regarded as some barometer for
deciding the recessionary impacts, since stock markets players believe in
philosophies of arbitrage and speculation and not purely economic happenings. There
have been many cases-in-point which prove that there is absolutely no co-relation
between the stock market indices and economic health of a country. Therefore
movement of stock indices (up or down) is not necessarily an indicator of an
economic slowdown or growth.
INDIANS have the tendency to look for short term gains / goals and not long term
gains / goals. This is what exactly is happening right now, about the US recession. It
is very important for India a much developed country than 1950s to look for the
long term growth instead of panicking looking at the short term lull in the markets.
WE need to look at this recession as a short term correction, just like what happens
in the stock markets. Basic economics suggest that What goes up must come down
(Business Cycles). It can be observed that in America following 2-3 yrs of growth, its
economy suffers 3-6 months of recession as a correctional tool. This time the subprime crisis triggered it.
IF at all, there is a major area of concern, then it is our agricultural sector which is
going to grow at a lesser rate than the manufacturing sector. This recession gives us
opportunity to be innovative and to think out of box so that the US directly doesnt
affect our robust growth. To some extent we can understand that IT revenues that
India generates is US-centric, maybe that is the reason why India catches cold when
the US sneezes. But still, the US recession is not something that India need to be
worrying about. India is well cushioned and should continue to keep its pace, never
mind if it bit slow.
WE need to believe strongly that, India has and will be bouncing back to its growth
trends in all respects and apparently nothing can stop it. All we need to remember is
"Believe in ourselves!" and the management thought "Every problem should be
looked as an opportunity".
SGGSCC & Anand Wadadekar