India and the Slowdown

there is a slowdown in the US economy, is no longer an issue or a point of
debate. However, concerns facing most of us are:

  • Why is there a slowdown and
    how deep is it?

  • What is going
    to be the impact on the Indian economy and on the Indian IT market?

First, let us try and understand the reason for the slowdown
of the US economy. There are two possibilities:

Possibility I:

The US economy had been on a high growth path for almost a decade now; a
correction was very much in the offing. Continued high growths over long periods
also lead to inventory build-ups and imbalances among different industries. Such
imbalances require corrections from time to time. Such a scenario is not too
unusual and occurs at least every 3-4 years. Typical corrective action is to
reduce the interest rates, so that consumers start spending again, leading to
the revival of the economy. With funds, which become more attractive,
investments restart. It is generally observed that economy starts rebounding in
10-12 months.

Possibility II:

US economy has slowed down because there have been heavy investments and very
high capacity build-ups. While investments have been made and huge capacities
have been created in almost all sectors of the economy, particularly IT and
telecom, enough demand is just not there. In such a scenario, correction really
means industry consolidation and a long waiting period, so that the demand can
again build up and a balance between demand and supply can be reached.
Correction time can easily last 3-4 years or even longer.

It is difficult to pinpoint exactly which scenario is at play. While the
second possibility cannot be ruled out, rebounding of Nasdaq during the last
week appears to indicate that perhaps the US slowdown is not so bad and it is
the first possibility that is at play.

Impact on the Indian economy

If we discount for some time, the sentiment or the rub-off effects of the US
slowdown, the impact is not really going to be much on India. The slowdown
really has two implications for India–decline in exports from India and a
decline in US investments to India.

  • Compared to many other Asian economies such as Korea, Indian economy is
    not so much globalized from the point of view of total exports as a
    percentage of GDP. India’s export as a percentage of GDP is less than 10%.
    And if we add to it that only about one-fourth of our exports is to the US,
    we are really saying that the US slowdown will not affect our total exports
    very significantly. With rupee devaluation, which has already taken place,
    exports growth rate may come down from 17% in 2001-02 to 12-13% in the
    current year.

The growth of software exports from India would definitely be affected,
though the effect is going to be of temporary nature. We expect the growth
rate to come down to 20-25% from the projected 50% earlier. The situation
should start improving 2002 onwards.

  • Compared to the size of the Indian economy, foreign investments in India
    are quite small. There are other factors such as attractiveness of the
    investment, infrastructure and bureaucracy, which either impede or drive
    foreign investments to a country. The current slowdown may not contribute
    very significantly to the slowdown in investments from US.

IDC believes that more than the external factors, it is the
internal factors, which are at play and more relevant to the performance of
the Indian economy.

The industrial growth rate is one such factor and a cause of
concern. The growth rate hit a real low in the month of February 2001 at 0.6%.
Industrial growth rate slowdown has a systemic affect on the consumers’
spending which again affects the industrial growth rate. Considering the
patterns in the last few years, the industrial growth rate is observed to follow
a pattern of alternate peaks and troughs. We believe that the growth rate has
already hit a low and improvement should start taking place. The index should
start looking much better Q3 2001 onwards. Overall, we expect the industrial
growth rate index during 2001-02 to be similar to 2000-01 but improve
substantially in the following year.

Under assumption that the monsoon will be normal and the
stock market will not nosedive further, we expect the GDP to grow at almost the
same rate as last year, that is between 6-6.2% in 2001-02. Assumption also is
that the political situation will start improving and not deteriorate any

Ravi Sangal is the
president of IDC India. He is engaged in a number of consulting assignments with
vendors in India and outside.

Leave a Reply

Your email address will not be published. Required fields are marked *