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The next in the series is probably the ongoing Afghan War,
but let's leave that aside for the moment. Instead, let’s talk about the first
slowdown of the century. What is the analogy in terms of impact on Wall Street,
which might well be the barometer of the global economy?

However, unlike the previous cases where war triggered off a
crisis and was also the reason for the economy bouncing back, the Afghan War and
the present slowdown have no connection at all. So why the comparison, one may
ask, particularly when 9.11 has worsened an already gloomy economic situation?
The US answer to 9.11–the war against terrorism in Afghanistan–made the
slowdown assume proportions of a recession.

Experts as well as history suggest that while war may be a
disaster for the people of the countries it is waged in, it is often an economic
blessing for the rest of the world. In a recent article, Harvard University
economist Robert Barro says the US government will now spend its way into a
deficit, giving the faltering US economy a much-needed push. ‘‘The silver
lining is that the attacks will probably signal the end of the near-recession we
have been experiencing,’’ Barro adds.

That’s something most economic historians accept. America’s
defense spending, at least during the prolonged wars–World War II, the Korean
War and the Vietnam War–has helped boost economic growth in the medium term.
What’s more, the September 11 tragedy has also triggered off major economic
initiatives by Western governments. The Federal Reserve has pumped in a massive
$100 billion into the market, interest has been cut by major central banks and a
$40-billion relief package has been sanctioned by the US Congress. What all this
points to is that the bottom has been reached. From now, its up, up and UP!

Surprised, are you?

After reading all the dire economic news out there, you might
be tempted to give up and hibernate for the winter. The signs do foretell an icy
mistletoe season. Employment numbers are not pretty, tech stocks–while up
notably from their September troughs, remain dicey and consumer confidence is
schizophrenic at best. But with the war against terrorism at its fag end, there
seems a sense of ‘all things wonderful’ pervading not only the US markets
but also the global economy after a period of uncertainty and hopelessness. What
we are about to say might stir up quite a debate, but there are powerful reasons
to feel optimistic right now. From retrenching men to actual announcements of
fresh recruitment, there seems to be hope on the horizon. Brokers and analysts
too seem to have reasons to cheer, with the spurt in share prices in the last
month, following some gains posted by the Nasdaq.

DQ spoke to several economists and market watchers, dug
through historical and current statistics, and analyzed reports to cull the best
feel-good facts we could find. And we found a lot of good news. And while our
troubles are not going to miraculously end tomorrow or day after, there’s
reason to exhale and relax!

Has it hit the bottom yet?

Barton Biggs, chief global equity strategist for Morgan Stanley Dean Witter,
concedes that the worst of the slowdown is, perhaps, over, especially given that
confidence has risen with the successful war and a rising stock market. "If
the US economy does recover now, the pattern maybe a W rather than a V, with
inflation also doing the rounds, a factor that markets have been
discounting," he says.

The bond market has caught up with the stock market in terms of anticipating
economic recovery. But we cannot maintain that the market has got ahead of
reality. Peter Canelo, managing director at Morgan Stanley Dean Witter, says:
"We have seen the worst from the economy and markets are telling us that
recovery is coming."

There is news of fresh orders for software majors in recent days, and this
has strengthened the belief of a V-shaped recovery for the sector. But given
that there has been no real growth in the US economy, the Indian sectors can
expect growth only by March 2002. But how can one talk about growth when others
are still talking slowdown? Well, are talking indicators not litmus test? And
these indicators are quite visible.

The signal turns green

Remember the old saying that when you point a finger at someone, the
remaining four point towards you? It is the same with the present-day economy.
While the finger pointing towards the slowdown is visible, the other four are
not. One, the thrust on short and long-term investment rather than the random
spending pattern of customers. Second, the mature percentages of topline growth
coupled with a stable bottomline revision. Third, there is a continuous shift
towards making technology and its other elements an enabler, not an economy by
itself. Fourth, the increasing trend of merging the divide between the Old
Economy and New Economy in terms of demonstrable results, profits on actual
growth rather than P/Es, and focus on customers’ needs, rather than
shareholder growth.

There are other indicators as well. The US-led war against terrorism is one
of the major ones. ‘‘There’s no doubt that many companies are making major
adjustments based on the state of the economy following the events of 9.11,’’
says Sunil Rajappan, director for client development at Cambridge Technology
Partners India. Others report plans to decrease merit budgets and incentive
payouts, as well as overhaul stock options. According to Rajappan, it also
appears that employers are more concerned about long-term retention and morale,
especially as they are reluctant to let variable pay sink too low.

For a moment, let’s revisit 9.11. While the stock market was making its
most perilous week-long dive in 60 years following the attacks on the Pentagon
and World Trade Center, some companies went against the trend in a rather big
way. The Raytheon scrip, for instance, went up 37% during the week (Raytheon
makes Tomahawk cruise missiles).

A distinct trend is emerging. While the horror of 9.11 has slammed industries
like airlines and insurance, companies in industries like defense, computer
hardware, security and telecommunications are finding new and increased
opportunities for business. The coming months will call for lots of
reconstruction, and demand is expected to flow towards companies equipped to
meet this demand.

‘‘Clearly, some people are going to benefit from this tragedy,’’ said
David Farber, professor for telecom at the University of Pennsylvania. Storage
is another big driver. The tragedy has also created a new market for companies
specializing in video-conferencing services–this stems, obviously, from the
immediate reaction of the corporate world to 9.11, total withdrawal from travel,
sending shivers down the airline and hospitality industries.

Stephen Andriole, former CTO at Safeguard Scientifics and now heading
TechVestCo, a New Economy consulting company, agrees. According to him,
video-conferencing can only be a short-term solution. ‘‘In the end, you need
personal contacts to sign business deals and hard-sell,’’ he says.

Talking about the impact of the situation on the Indian IT industry, Ravindra
Datar, senior analyst (IT services and printers) at Gartner India Research &
Advisory Services, says: ‘‘We have always maintained that an economic
slowdown for the US need not necessarily mean a corresponding slowdown in Indian
IT services industry revenues.’’ The US affairs did result in a challenging
situation for most IT vendors, but it also opened up new opportunities. Gartner
suggests that this will actually open up new avenues for Indian IT vendors due
to advantages of the offshore centric global delivery model.

Gartner says while the economic recession and a tragedy of the scale of 9.11
are bad for any business in the short term, these have jolted businesses out of
their complacency.

An IDC Asia-Pacific study reveals that the IT environment has changed
markedly in 2001 and the recovery will commence in H2 of 2002 in the
Asia-Pacific region. According to the report, IT will continue to remain a
critical investment. But on the whole, there is a gradual improvement predicted
for 2002 which will be enhanced in 2003 and spiked in 2004.

The mad ad world

While the industry has been reducing spending on advertisements this year to
handle expenses, a study by Zenith Optimedia Group predicts single-digit
positive growth by next year. The report forecasts that the trend would level
off in Q2 2002 and move towards complete recovery Q3 onwards. It adds that even
though travel advertising was hit hard due to 9.11, this will rebound soon, as
has been witnessed before.

Consumer spending

Industrial production data for the July-September quarter shows an isolated
glimmer of recovery. Can we take this glimmer as a pointer to recovery? No. For
one thing, the overall index of industrial production (IIP) growth rate has
slowed down from the first quarter to the second. Second, excise collection has
shrunk by 0.6% in the second quarter after growing in the first. The demand for
residential property is booming, housing finance companies report healthy credit
offtake and cement sales are up.

However, that isn’t happening for consumer durables, where sales are driven
by discounts and freebies. Experts suggest that rather than getting optimistic
about the few positive blips, the government should start worrying seriously
about a demand-led recession. To get India out of this trap, the government
should start spending aggressively on infrastructure. The monetary policy alone
is ineffective in boosting demand, and only pump priming will work.

The US economy shrank at the rate of 0.4% in the July-September quarter, the
biggest drop since the last recession in 1991, a signal that the country may be
heading toward a full-blown downturn. Economists believe economic output will
decline by an even larger percentage in the current October-December quarter.
Consumer spending in the July-September quarter rose at a rate of 1.2%, its
slowest pace since the first quarter of 1993 and down from a 2.5% increase in
the second quarter, but still far stronger than analysts had led us to expect.

Auto sector: Vroom vroom...

Riding piggyback on the festive season, automobile sales recorded an increase
of 8.6% in month-on-month sales in October 2001, totalling 496,688 vehicles. For
the period between April and October 2001, total automobile sales increased by a
healthy 7.1% year-on-year to 3 million. Two-wheelers, as a segment, continued in
the top gear in October 2001 to grow at 24.4% YoY to 411,677, thereby extending
9.4% growth for April-October 2001, to 2.4 million vehicles.

According to Kishore Rao, managing director of Parametric Technology (PTC)
India, ‘‘The last eight months have seen 25 new two-wheeler models and 30
new TV models being launched. This is more than the combined launches of
products during 2000.’’ This means that companies are trying to get closer
to customers by using IT as an enabler. There is a thrust in value engineering
initiatives and an improvement in productivity. Time-to-market is getting
shorter. Read behind the lines–Good news for IT.

Oily future

While oil prices were expected to rise due to fears of shortage of supply and
the proximity of oil producing countries to Afghanistan, prices actually plunged
to a two-year low, hovering around $17 per barrel. With OPEC (Organization of
Petroleum Exporting Countries) not cutting back on production, lower oil prices
are expected to stimulate demand.

Anything that serves to keep oil prices low, experts say, provides powerful
medicine to the ailing US economy. A full year of oil prices as low as $20 a
barrel, says Wells Fargo & Co’s chief economist, Sung Won Sohn, would do
more to fuel economic recovery than the economic stimulus package being debated
in Washington. Opec’s mission of keeping oil prices high is being thwarted by
more than just Russia’s production. Norway and Mexico have also emerged as
major non-Opec oil producers, and Norway last week was still refusing Opec
demands to specify the size of its own production cut next year.

The recalcitrance of Russia and Norway comes as the world’s fragile
economies have sharply curtailed demand for oil. The September 11 attacks
clobbered economies worldwide, taking a major bite out of airline travel and
demand for industrial goods. So cheap is the price of crude oil now that most
analysts expect US gasoline prices to drop below $1 a gallon in the near future.

With weakened demand, the ability of non-Opec producers to pump out millions
of barrels of oil a day exerts stronger-than-normal pressure on prices. A
convergence of events has led to Russia’s new power in the oil market. Chief
among them is the fact that Russia has finally cleaned up its corporate act,
successfully privatizing most of its oil industry and making inroads against
corruption. "In some ways, Russia is the accidental actor in this drama,
having begun to rebuild its petroleum industry just as demand for oil fell. By
agreeing to cut exports of crude oil, not production, Russia can keep energy
exports flowing, though they are likely to be in the form of home heating oil,
which was not included in its Opec offer," says Bill O’Grady, energy
analyst for AG Edwards & Sons in St Louis, USA.

And lots to eat…

Finance minister Yashwant Sinha had said a better performance by the
agricultural sector would lead to a rebound in the flagging economy next year.
Addressing the Rajya Sabha, Sinha said that as a result of the government’s
efforts and better agricultural performance, the economy would see better growth
in the last quarter of the financial year and the ensuing quarters of the next
financial. The minister also said agriculture and food management would continue
to be major thrust areas for the government in the coming years.

According to a report of the Commission of Agricultural Costs and Prices (CACP)
for crops sown in 2000-01, the Indian agricultural sector can no longer ignore
trends in the international commodities market. The most significant implication
of this is borne out of the fact that world price movements are much more
volatile than domestic prices and increasing integration means the Indian farmer
is becoming more susceptible to changes in world prices than ever before.

Thus, the report says, the agricultural pricing policy has to be redrawn in
an open economy framework where long-run price trends will be governed by
long-run movements in international prices rather than domestic costs of
production.

An alternative to hedge against price volatility is the development of
futures exchanges. In India, hurdles on this count remain–such as lack of
credibility of settlement procedures and unreliable price quotations. Besides,
the functioning of future markets in countries like the US show that future
prices are closely related to spot prices and are no less volatile. An
alternative suggested by CACP is an automatic policy of variable tariffs on
agricultural imports and exports. This means that if the international spot
price falls below or exceeds a certain benchmark moving average price, it would
attract variable tariff on imports or exports, respectively.

The final word

There are signs that people and economies are beginning to tire of the word
slowdown and the mood that it brings in its wake. And as the indicators listed
above show, the economy is beginning to heat up. So long as we learn some
lessons from 2001 and use them to our betterment, we need not revisit the
specter of sluggishness any time soon.

SHUBHENDU PARTH & DHANYA
KRISHNA KUMAR in New Delhi

With inputs from Amit Sarkar