Last month, India's powerful software industry body -- the National Association of Software and Services Companies (Nasscom) -- held a meeting to do a reality check amid rising global economic concerns: Is the Indian growth engine slowing down? Does India need to worry? How sharply will the US recession hit the nation?
The meeting concluded partly on a note of optimism and partly on a note of caution. Consensus was found only on the matter that Indian companies and, indeed, the government will have to tackle the spectre of uncertainty in the coming weeks.
For the first time in three years, India -- Asia's third-largest economy -- will grow at just over 8 per cent, although it will still remain the fastest growing nation after China among the world's biggest economies.
High interest rates, lack of consumer demand for goods, skyrocketing real estate prices, rising rupee value, crashing stock market, declining exports in terms of value, soaring oil prices, and a looming US recession have all come together to create a situation which can cause a deceleration in the nation's galloping economy.
India GDP growth pegged at 8.7 per cent
India's gross domestic product is now forecast to grow at 8.7 per cent. Growth in the last financial year was at a stunning 9.6 per cent.
Most economists believe that the US recession might still not hurt India too much as the country's economy is slightly decoupled from America's and also because India's domestic growth engine is powerful enough to churn up a high growth rate, with the spending power of its 300 million-strong middle class rising.
India's growth can further accelerate if India's Finance Minister P Chidambaram takes necessary fiscal and monetary measures to boost higher growth, like beefing up government spending on social and infrastructure projects, cutting taxes to give more money to the masses to spend and getting the Reserve Bank of India to reduce interest rates.
Economists at global investor DSP Merrill Lynch peg India's economic growth at just above 8 per cent, similar to that of rating agency Crisil, and merchant bankers JP Morgan, Yes Bank, and other financial institutions.
None of them believe that India will face a recession similar to that of the United States. Yet, a slowdown is a slowdown and the nation needs to be ready with a plan to ride out the storm.
'We forecast India's GDP growth to slip to 8.5 per cent in the first quarter 2009 and pick up to 9 per cent and above thereafter,' Macquarie Research analysts said in a recent note.
The media now looks to US-related economic data with growing concern, particularly in relation to its impact on two of the world's fastest growing economies -- China and India.
And while the debate continues on whether to announce the condition in the US as a 'recession' or a 'slowdown,' the crucial issue is how much the Indian economy will be impacted by the US factor.
India: No more an oyster
India's exports have already faced the brunt of a weak dollar, having decelerated 21.7 per cent during the April-December period last year from 23.9 per cent in the year to March 2007, hit by the strong rupee which rose 11 per cent against the dollar.
India's software industry, which accounts for 5 per cent of gross domestic product and employs 2 million workers, also showed signs of strains.
Recent third quarter earnings data ending December, of top companies revealed some pressure of a weakening dollar (against the rupee) and a strain on billing rates. Most of India's software companies bill their clients in dollar terms, which would impact their foreign currency earnings.
The shares of India's top software exporters -- Tata Consultancy Services, Infosys and Wipro -- have languished in recent months and the sectoral BSE IT index has fallen just over 29 per cent from a year ago.
Nasscom officials maintained that the sector would meet its software export target of $60 billion and overall software and services revenue goal of $73-75 billion by 2010.
An impressive story so far. . .
India's economy expanded by 9.6 per cent in the last fiscal year, its fastest since 1989 and second only to China, according to data which the Indian government released earlier this year.
India's finance minister said last month that he was optimistic that the economy would grow by near nine per cent this financial year. India's central bank has pegged a GDP growth of 8.5 per cent for the year to March 2008. India's economy had expanded by 9.1 per cent in the first half.
. . . but there are concerns
In 2008, the stock markets reacted sharply to global economic concerns, with key emerging markets seeing their largest monthly fall in seven years, since September 2001. Almost every emerging market fell including Turkey (-24 per cent), China (-22 per cent), Russia (-16 per cent), India (-14 per cent) and Korea (-14 per cent) after 2-3 years of sharp gains.
"If the US were to go into a profound recession and the world does follow her in the deep pit, India may still grow 6.5 per cent," said Vijay Gaba, analyst with DSP Merrill Lynch in a latest research report to clients. But this is the worst-case scenario, which Merrill Lynch economists do not forecast.
The highly uncertain external environment and risk aversion amongst global fund managers may keep emerging markets, including India, volatile for next few months, he adds.
Exports would continue to be hit and the mood would be of risk aversion. Shubhada Rao, chief economist with India's private sector new-age Yes Bank says, "We expect IT exports to slowdown between 10-15 per cent, simply based on expenditure cuts across the US as they deal with recessionary-type scenario."
While India's earnings are being impacted, risk aversion is prompting overseas funds to pull out monies from emerging markets (where they made a windfall in earlier years) to repatriate it back home, where recessionary conditions loom.
The Indian rupee this week hit its lowest level in five months against the dollar, at 40.15 after ranging between 39.2-39.6 levels through the second half of 2007.
Credit rating agency Crisil's economist D K Joshi said that the US's demand for imports will slow down and there would be an increasing shift in mood towards risk-aversion, which may also impact capital fund flows to emerging markets like India.
Slowing industrial production: should India worry?
India's latest industrial production data showed a growth of just 7.6 per cent in December last year, far below last year's double-digit expansion. The fall was due to a fall in manufacturing growth to 8.4 per cent from 14.5 per cent a year earlier.
Theoretically, a fall in manufacturing sector growth does not necessarily mean that the economy is slowing down. In India's case, analysts say, the fall was due to RBI's current monetary policies which seek to curb inflation and credit growth, which had surged to over 30 per cent last year.
India's central bank has hiked interest rates nine times since 2004, to push inflation down, which is at just above 4 per cent.
The RBI has kept its repo rate -- the short-term lending rate to banks -- unchanged at 7.75 per cent, and left the amount of cash banks must set aside in reserve at 7.50 per cent. It maintains that the risks to inflation are high, even while analysts say India is approaching the stage where a boost needs to be given to maintain higher growth momentum.
On the exports front, India's domestic demand story is expected to sustain against any US-linked pressures, analysts say. The key point in India's favour is that it is less exposed to the external macro risks facing China and other Asian economies, which have a huge exposure in terms of exports and trade links with the US.
Also, India's percentage of exports-to-GDP through goods and services constitutes just about 20 per cent of GDP, amongst the lowest in the region.
Fundamentals remain sound
Analysts now await direction from the nation's Budget this year. Yes Bank's Rao suggested that the move should be to boost infrastructure spending, which would bring momentum to goods, services, rural and urban housing sector.
"Measures need to be taken to spur domestic growth, with a focus on infrastructure projects," she said. "I do not think that India's economy is in trouble. . . sure there are headwinds at the moment but there is little to panic about," she said.
India could do well to improve employment and rural infrastructure spending," she added.
Economists expect the RBI to lower interest rates by 25 basis points in the second half of 2008.
"By June-July this year, the RBI would be in a better position to decide on rate cuts. It would have time to evaluate and analyze the global credit scenario, central bank rate cuts and oil price trends," Rao said. Crisil and equity research firm Macquarie Research also believe that a rate cut will come soon.
Most economists believe the US economy may not go through a deep and prolonged phase of recession. "We believe it will be a mild one and allow some other economies to pull through a rough phase," Joshi said.
Markets: choppy but not sinking
Global investor Morgan Stanley Asia Pacific, in a recent report on India's equity earnings, said the aggregation of analysts' estimates for the third quarter ending December 2007, showed an 18 per cent year-on-year growth expectation in net earnings for 103 companies in the bank's coverage zone.
This would mean a deceleration in growth from 49 per cent and 22 per cent levels in the June and September quarters, respectively, the note to clients said, this week.
From an equities perspective, the Indian markets will continue to remain volatile and nervous, in the absence of sustained overseas inflows. Overseas funds have sold Indian equities worth nearly $3 billion in 2008.
While India's economy is relatively well insulated from the global economy, its earnings are not. Merrill Lynch India chief strategist Jyoti Jaipuria believes that earnings will slow from 36 per cent in FY 2007 to 16 per cent in FY2008, a note to the bank's clients said.
Interest rate sensitive sectors like property, auto, banking and steel stocks have turned volatile even as India has embarked on a tight monetary policy to curb rising inflation and credit growth.
"There's no reason at all to allow the worries of the Western world to overwhelm us," Chidambaram told local television channels in January after the benchmark 30-share index -- the Sensex -- fell 12 per cent in just two trading days starting January 21, urging investors not to panic.
It recovered marginally from there, but remains 13 per cent down this year led by overseas outflows of $2.94 billion. The Sensex rose by a record 47 per cent last year on huge overseas inflows of $17.23 billion on optimism of strong economic growth.
A scene from the India Leadership Forum 2008, the annual summit of the National Association of Software and Services Companies, in Mumbai, last month.
Photograph: Indranil Mukherjee/AFP/Getty Images
