Indian economy strong enough to weather US subprime fallout

Indian economy strong enough to weather US subprime fallout

New Delhi: India should escape any 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 gradually been 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 past few weeks amid concerns about the shaky US subprime sector of housing loans tocustomers 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 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 economist Manika Premsingh, whoworks for Mumbai-based Edelweiss Capital Ltd, a brokerage firm. In addition, India’s banking sector is not directly exposed to the subprime troubles that have upset global markets, unlike some banks in the UK, Germany and elsewhere, economists said.

“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 JPMorgan Chase & Co. economist Rajeev Malik in Singapore.

But worries persist the crisis has not blown out. Late Friday, US authorities moved to reassure investors they would protect the economy from the subprime chaos. On Monday, Germany’s IKB Deutsche Industriebank said it could lose nearly $1 billion (Rs4,100 crore) after its subprime loan portfolio went bad.

Private consumption accounts for 62% of India’s gross domestic product (GDP). Exports as a percentage of GDP represent less than 15%.

The booming outsourcing and IT sectors, which fear a possible US economic slowdown could hit budgets of cost-conscious companies farming out work to the country, accounts only for 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 & Partners Ltd. But “the US subprime situation does not have a direct effect on the growth."

The Indian economy grew by 9.3% in the first quarter to June. While economists expect it to slow in the coming quarters because of the aggressive monetary tightening policy of the Reserve Bank of India to fight inflation, economists still forecast full-year growth of 8.5-9%, compared with 9.4% in the past year.

India’s economy has grown at an average of 8.6% annually in the past three financial years, making it the second fastest expanding economy after China.

But some insist that the subprime upheaval could cause a “significant" slowdown, because “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," said Soumitra Chaudhuri, economic adviser to Indian rating agency Icra Ltd, a wing of the US-based Moody’s Investors Service. “Our growth story is still one mainly of domestic demand."