Thursday, September 25, 2008

Would India be hit by Global Economic Crisis?

This has been the dinner table topic for most of my week, with everyone asking about it. It is interesting, because for most Indians, this economic crisis is still a distant thing. Well, most, except the workers in BPO, who got hit first.



I was telling someone that this is like an impending Tsunami. It is instructive that when the devastating Indian Ocean Tsunami took place, the ocean water actually receded in some places and people flocked the shores wondering what's happening: And, then it came.



I see the same confidence on many Indians, especially those investing in real estate. Someone told me that in fact this crisis will eventually result in global economic leadership shifting to India and China. Not an unusual opinion. Another opined that India will not have a mortgage crisis, as lots of black money is actually sunk into property and there is little reason to default for Indian borrowers. Yet another said that India has real demand - as opposed to speculative demand which drove up prices in the West - and hence, it is unlikely that Indian prices will fall.



Unfortunately, such confidence is possibly misplaced. For a variety of reasons, but principally owing to the very unequal nature of India's economic development. The prosperity was not shared - among classes as well as geographically. In fact, more people are worse of in India than they were twenty years back. So, India may lack the 'real' demand to go on at the face of recession.



Also, India is not China, and what we have got is a very dependent economy. Our success story is inextricable from America, whereas China has a broader basket of partners and trade. The Chinese public finances are far stronger than India's, though there are many rumours about the health of the Chinese banks. India's trading patterns are highly skewed towards Europe and North America, but China enjoys far higher trade with ASEAN, Africa, Middle East and Africa as well.

Besides, India's recent economic success story is, as seen by the media, manifested in stock market. However, the stock market indices got a lift mainly because of Wall Street dollars flowing into it, dollars that have already started leaving the country, leaving the stock market quite low and the currency in tatters. Here also, a significant difference with China - the Foreign Direct Investment in India is yet to go anywhere close to Chinese levels, the investment in economic activities like manufacturing and services, investments which are harder to pull than its stock market counterpart.

It seems that Indian Real Estate and Stock Market will take the hit, as will the poster boys of the New India - the IT and Offshore Service companies. One reprieve - I think the wage growth has slowed and the labour market has slackened a bit. But inflation is obstinately standing at 12.34%, creating further pressure on the currency and leaving people significantly worse off. It is great that the business confidence continues to be high, but that's no cause to cheer - irrational exuberance does not always end well.

As I now travel to Manila, I leave India with a concern - the new-found confidence is only too fragile, and the impact of a sustained downturn is unknown. Indians, in general, have never experienced a global economic crisis from close quarters; this time, it seems, they will have to endure the winter together with everyone else.

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