US crisis will slow India’s growth, say analysts

October 1st, 2008 - 1:59 pm ICT by IANS  

New Delhi, Oct 1 (IANS) The financial tsunami in the US, which threatens to engulf Europe, will slow India’s economic growth to about 5-7 percent, economists and analysts said. “It is not just financial markets, there is now a process of adjustment in the real economy as well,” said Partha Mukhopadhyay, an economist at the Delhi-based think tank Centre for Policy Research.”Economic growth is likely to be in the region of 5-7 percent,” Mukhopadhyay told IANS. “Certainly, six percent growth is not the same thing as nine percent growth.”

The government has been consistently saying India’s growth would stabilise in the 8-9 percent region by the year-end.

The comments came hours after Prime Minister Manmaohan Singh was quoted by French daily Le Figaro as saying the global financial crisis would impact India.

“If the financial crisis causes a recession, this will compromise our exports,” Singh, on a two-day visit to France, was quoted as saying.

Mukhopadhyay said there are a number of channels through which the global situation will impact the real economy.

“There has been a lot of external commercial borrowings in the last few years and the exchange rate movement can substantially increase the cost of these borrowings,” he said.

“The US is our major trading partner and the export basket for the American market covers a wide range of products and commodities such as software, gems and jewellery, auto parts and machine parts, apparels, pharmaceuticals and a few others,” Mukhopadhyay said.

According to him, all these sectors will witness lower demand but because of rupee depreciation, prices of Indian products will still be competitive.

The impact on India will be less than that on more open or smaller economies, Mukhopadhyay added.

“The real impact is, therefore, an empirical question and we can know about it only after a few months, but a recession in the US market is certainly not good news.

“Entrepreneurs don’t like to make commitments during times of uncertainty, so expansion plans will get deferred.”

Echoed Jagannadham Thunuguntla, head of the capital markets arm of India’s fourth largest share brokerage firm, the Delhi-based SMC Group: “Yes, those who have not started expansion will defer plans but the problem is with those who are now in the middle of their expansion plans.”

Thunuguntla referred to the quantum of funds raised through the capital markets this year, and said: “Last year, there were 101 initial public offerings (IPOs) to raise Rs.332 billion. This year, there were just 36 IPOs till date to raise Rs.169.2 billion.”

Worse, he said, Reliance Power alone raised Rs.110 billion of this. “So the rest raised only Rs.59 billion,” Thunuguntla told IANS.

Another 36 IPOs either lapsed, or were scrapped or could not be completed; these would have together raised Rs.278 billion, the analyst said.

Similarly, qualified institutional placements have come down to four this year from 27 in 2007. Last year, about $5,000 billion was raised, which till date this year is just $500 billion - one-tenth of 2007.

“So if companies are not expanding and growing, how can the real economy grow?” Thunuguntla asked.

Companies are not doing well either; the advance tax payments of top real estate companies are another indicator, he said.

At least three top real estate companies have made no advance tax payments for the quarter ending Sep 30, against nearly Rs.300 million that each paid last year.

“That means they have not made any profits this quarter,” Thunuguntla said.

Both Mukhopadhyay and Thunuguntla, however, agreed that if the US contagion does not spread further into Europe and into Indian banks and US lawmakers put in place some package to stabilise the markets, there will be an impact here, but it will still be relatively limited.

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