BEAR MINIMUM

A consumption-driven economy with only 15 per cent propelled by exports seems to still hold the fort for India. With the US feeling the slowdown pressure, the Federal Reserve, the country8217;s central bank, again went in for a monetary policy review and decided a rate cut-a 75 basis point cut on Wednesday after the global markets bled on a daily basis. The impact of this slowdown is likely to show up though it is expected to be a mild one.

According to Subir Gokarn, chief economist, Standard 038; Poor8217;s, Asia Pacific, 8216;8216;In the event of a relatively mild recession which seems to be the most likely outcome for US, I think India is going to be impacted though it won8217;t be much in the short-term. At the macro level, even in the medium to long term I don8217;t see a significant impact on India.8217;8217;

So, if we are going to have some sort of impact what would be the likely quantum of this impact on our GDP growth rate? 8216;8216;Not much,8217;8217; says Abheek Barua, chief economist, HDFC Bank. 8216;8216;We are anticipating a slowdown from 9 per cent earlier to below 9 per cent now. In the worst-case scenario it may go down to 8 per cent or a little below 8 per cent for 2008-9.8217;8217; Adds Gokarn: 8216;8216;For 2008-9 we are looking at a growth rate of 8-8.5 per cent.8217;8217;

This does go ahead to state that our real economy in the short term is not completely decoupled, but this is largely on account of the export-oriented sectors and the global commodities and oil. According to Vineet K. Vohra, chief executive officer, ING Investment Management, 8216;8216;The impact of the US slowdown is likely to be less severe on us due to the underlying strong domestic fundamentals of the Indian economy. We might see a moderate slowdown in our growth of up to 0.5-1 per cent in GDP over the next one to two years. Infrastructure spending and consumer demand will drive growth and mitigate the slowdown in the outsourcing and export sectors.8217;8217;

Whereas confidence is oozing all around on the inherent strength of the economy, there are certain concerns that have the potential to become worse. 8216;8216;A key risk though is the possibility of further increases in oil and other input prices that could retard the growth and lead to a stagflationary situation,8217;8217; says Vohra.

What this US slowdown or a probable recession has done to the Indian economy in the short term is that it has brought down the GDP growth rate expectation from a level of 9 per cent and above to about 8 per cent now, which seems most likely.

But if it has impacted India8217;s economic growth rate somewhat, it has had a far more severe impact on the Indian stock markets though not leaving the other global indices alien to its impact. This is because of the rather more direct linkage of global stock markets. If the investor sentiments turn negative, money starts flowing away from more risky markets to safer havens or other asset classes. This time too money started to flow out of the Indian market in anticipation of risk. 8216;8216;The initial reaction was to get into the mode of flight to safety, get into cash, minimising risk. But going ahead we are better placed and money will flow in,8217;8217; said Gokarn.

In the medium term, the GDP growth rate is likely to pick up after the global impact subsides and as the Indian economy further strengthens. India currently is the second-fastest growing economy after China and it is gaining strength with every passing year, be it in terms of removing infrastructure bottlenecks, utilising its resources or increasing efficiency. According to Barua, 8216;8216;We should pick momentum in the medium term as the changes that are being initiated now on structural front might begin to pay off. We might move to a higher trajectory to a 9-10 per cent growth rate. I also think a larger share of exports and manufacturing will contribute in this phase.8217;8217; Thus, going forward, over the next three to five years, we will see a thrust in our growth rate as a result of the current structural changes.

The joke in the growth pack is that the US may not really go into a recession, something that economists and market players are fairly sure of. According to Sandesh Kirkire, chief executive officer, Kotak Mahindra AMC, 8216;8216;I don8217;t think that the US will get into a recession. The central bank will come to the rescue of the economy by cutting the interest rate or take fiscal initiatives to ensure that the economy comes back on track.8217;8217; Thus, in the long term the negativity does not seem to exist.

Away from global uncertainty, India is expected to grow fast and if the infrastructure growth continues the way it has been planned, it is likely to grow the China way. Says Barua: 8216;8216;Depending on the sorting of critical bottlenecks on the front of infrastructure and labour, we might hit on a growth rate above 10 per cent in the long term.8217;8217;

There will be certain other factors too that will impact the long term growth, says Gokarn. 8216;8216;I think the growth rate will maintain itself at above 9 per cent, given factors like demographics of the domestic market and the resource base along with the infrastructure growth.8217;8217; he says. 8216;8216;If these continue, the growth momentum will stay.8217;8217;

While India is largely decoupled from the global factors when it comes to real economy, it does tend to see its markets getting impacted by global factors. 8216;8216;The day our valuations went higher than those of the US, we were decoupled,8217;8217; says Kirkire. 8216;8216;But since there are factors of global liquidity that impact all markets simultaneously, pressures builds up in terms of volatility in the market.8217;8217;

Though in the short term there might be some pressure on the Indian economy and hence Indian stock markets that may lead to a downward revision of GDP growth rate and a flat Sensex, the long term continues to look bright.

MARKETS WILL GO FORWARD
In the short term, the market may remain volatile; in the long run, it will grow

The market tends to always discount economic factors along with any other relevant information while providing a valuation. The high valuations that the markets were trading on just a week back was a result of overenthusiasm of the investors on the future prospects of the economic growth and corporate performance. The fundamentals of the economy hold strong for now as the revenue and the profit growth for this quarter for the list of 73 companies in the BSE 200 that have disclosed their third quarter results stands at 27.7 and 45.5 per cent respectively.

However, this growth rate may not be sustainable in the short term as we move ahead in this calendar. Global events and uncertainty will take its toll on Indian markets as well. 8216;8216;The corporate performance might see some downward revision in 2008 which might impact the first half of 2009 largely on the back of global problems. After that, I expect the growth rate to get strong,8217;8217; says Barua.

As far as the market performance is concerned it tends to align with corporate profitability or even at times runs ahead of it, says Kirkire. 8216;8216;In the long run I expect corporate profits to grow at 15-20 per cent and the market returns should be expected on the same lines,8217;8217; he says. The current fall has raised concerns for the investors and has shaken their confidence.

In the short term, the global liquidity will define the market growth and thus is largely expected to remain volatile because of the US economy slowdown. According to Vohra, 8216;8216;Some correction is always healthy and India had become a tad overvalued. In the short term, the market seems to remain volatile. Corporate growth is likely to be in the range of 20-22 per cent. In the long term, we expect the stock market to grow at 20-25 per cent.8217;8217;