New Delhi: The main concern for the emerging market economies (including India) may not be the direct exposure to global financial institutions, but more about access to credit and the slowdown it is causing in America and other European economies.
Click here to watch video
RPG Foundation chairman and economist, D.H. Pai Panandikar, says that Indian markets may not be as affected by the subprime crisis as they would be if there was a recession in the US. He adds that Europe is on the brink of recession, and Germany is already in it. When big countries hit a recession, it is bound to have an effect on the Indian economy. ”This will affect our rate of growth,” he says.
Economists point out that the extent of the effect will be decided by the nature of the US recession. If it is shallow (and the US comes out of it quickly), India may not suffer much of an impact. But if it is long and deep, India’s exports will be hit.
As per S&P India Principal Economist, D.K. Joshi, “Countries in the western world are net importers. If they slow down, Asian imports will also slow down. “
And don’t forget the liquidity crunch - India Inc is already having difficulty in raising funds. Market sentiments remain weak as FIIs pull out money and uncertainty rules.
Funding in sectors like real estate are showing signs of drying up altogether. Other Indian companies looking at borrowing outside will also have more difficulty, and the GDP growth too is expected to stall.
D.K. Joshi says that his company has forecast India to grow by 7.8% this year. ”Next year will be slower,” he says.
Yet there are some bright spots amid this gloomy scenario. Sanjay Panth, IMF India Representative, says that different countries will benefit or be affected differently. For instance, India is different from some other large emerging market economies in that it is not a net commodity exporter. In turn it will be helped by the decline in prices of commodities. Also its large domestic demand does shield it to some extent from the events outside. Panandikar adds that IT companies may actually benefit as there will be pressure on US companies to cut costs. So outsourcing to Indian IT companies may actually increase in the long run.
So when does the situation for emerging markets start to improve? Will the bailout proposed in the US market work? Panth says that what we have seen in the past few weeks is a shift from a piecemeal and a reactive approach to one that is more systematic. ”And we at the fund welcome that,” he says.
The IMF says that though the American economy should start improving in the latter half of 2009, but recovery will be slow. Other economists are more pessimistic. Panandikar believes that the US will recover only by 2011-2012.