Mumbai: Since the developed nations have been the ones most affected by the crisis, the biggest risk to the current recovery, too, lies in them. If growth in the developed world slows and the much-feared double dip becomes a reality, then Indian exports will suffer.

A recent survey of global fund managers by Bank of America-Merrill Lynch finds that global growth expectations are easing from the highs seen in December, as investors digest the risks from the over-extended fiscal positions of many countries, especially in Europe.

Graphic: Yogesh Kumar / Mint

For the banks, much depends on what happens to the housing sector. US analyst Meredith Whitney has said the US is sure to see a double dip in housing, which will force credit writedowns in banks and impair capital. Bank lending in the US has still not picked up, which means that the US consumer is wary of taking on more debt. That is not difficult to understand, given the job losses and the fact that household debt to GDP ratios are still very high.

Societe Generale SA economist Albert Edwards, admittedly an unabashed bear, points out: “Household leverage has returned to 94% (of GDP) from its peak of 96% in both 2007 and 2008. But consider this: At the peak of the Nasdaq bubble, household leverage was just shy of 70%. There is a very, very long way to go."

Banking problems may lead to another bout of risk aversion, raising the costs of international borrowing for emerging markets and curtailing portfolio flows to them. Protectionist tendencies might grow as countries start looking for scapegoats for their troubles.

Then there’s also the China risk. Several commentators have said China is a bubble waiting to burst and that its torrid pace of investment growth cannot be kept up. That, in turn, will mean lower growth for the commodity sector. The good thing is that analysts have been calling China a bubble for almost a decade, but it has defied all the doomsayers.

This is what United Nations Conference on Trade and Development had to say in a recent policy note: “In fact, the rebound of stocks, commodity futures and currency trade in several emerging and developing economies since March 2009 displays the makings of highly correlated big new bubbles and the threat of a new round of financial crisis."

This is the last in a five-part series on the macro-risks India faces. To see this and the series, go to