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Indian economy seen escaping US subprime fallout

Indian economy seen escaping US subprime fallout
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First Published: Tue, Sep 04 2007. 02 21 PM IST
Updated: Tue, Sep 04 2007. 02 21 PM IST
By Penny Macrae/AFP
New Delhi: India should escape major fallout from the US subprime credit turmoil thanks to its largely insulated economy but the country’s outsourcing sector has cause for concern, economists said.
While the nation of 1.1 billion people has been gradually easing rigid state controls on trade and investment and opening up its economy, it remains far less exposed to global financial upheaval than many countries.
Global financial markets have been volatile in the last few weeks amid concerns about the shaky US subprime sector of housing loans to customers with bad credit histories.
That has led financial institutions worldwide to examine their investment risks and plan for any possible long term fallout, including heavy losses, from once investing in bad debt.
India, however, appears to be in a strong position to withstand aftershocks.
The country has “largely a domestically driven economy with limited trade dependence,” said Mumbai-based Edelweiss Capital brokerage economist Manika Premsingh.
In addition, India’s banking sector is not directly exposed to the subprime woes that have upset global markets, unlike some banks in Britain, Germany and elsewhere, economists note.
“The direct and indirect exposure of the Indian banking sector to the subprime woes is limited and does not pose a threat to either the local banking system or to the economy,” said JP Morgan economist Rajeev Malik in Singapore.
But worries persist that the crisis has not blown out. Late Friday, US authorities moved to reassure investors they would protect the economy from the subprime troubles.
On Monday, German’s IKB bank said it could lose nearly one billion dollars this year after its subprime loan portfolio went bad.
Private consumption accounts for 62% of India’s gross domestic product. Exports as a percentage of GDP represent less than 15%.
Also, the booming outsourcing and IT sectors, which fear a possible US economic slowdown could hit budgets of cost-conscious firms farming out work to the country, but this accounts for only 5.4% of India’s GDP.
“There may be some cases of business process outsourcing or call centres affected,” said Deepak Lalwani, director at London’s Astaire and Partners.
But “the US subprime situation does not have a direct effect on growth.”
The economy here grew by a surprise 9.3% in the first quarter to June. While economists expect it to slow in coming quarters due to aggressive monetary tightening to fight inflation, economists still forecast full-year growth of 8.5-9.0% compared with 9.4% in the past year.
India’s economy has grown by an average annual 8.6% in the past three financial years, making it the second fastest expanding after China.
But some insist that the subprime upheaval could cause a “significant” slowdown, as “Global risk” has been “at the heart of India’s current growth acceleration cycle,” Morgan Stanley economist Chetan Ahya said.
Foreign investors have poured billions of dollars into the country to capitalize on its scorching growth, creating vast foreign exchange reserves.
“If the current global risk aversion trend continues for more than three months, we believe India could face a significant deceleration in growth,” Ahya said in a brokerage note last month.
“It all boils down to international integration. Our growth story is still one mainly of domestic demand,” said Soumitra Chaudhuri, economic advisor to Indian ratings agency ICRA.
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First Published: Tue, Sep 04 2007. 02 21 PM IST