Figure of nine

Or, we can look at capital flows, and how flows to emerging markets and to India will change when interest rates and stock market returns change in the US. This analysis hogs the limelight as FII analysts focus on expectations about stock market indices in India and abroad. There is little consensus, but, in general, the India growth story is finding support in various analyst reports.

A third way of looking at the impact of a slowdown in the US economy is through the trade link. How directly exposed are Indian exports to the US economy? What is the share of services in our exports that might be hit by a US recession? In the context of a fast globalising economy that has seen business cycle ups and downs along with global cycles in the last 15 years, this could be a very important element in how the Indian economy will perform. Figure 1 shows that export of goods as a per cent of GDP has risen rapidly from just above 5 per cent to 14 per cent in 2006-07. In other words, exports have grown much faster than GDP. Services exports have risen even faster. As a result, when goods and services are considered together, we find that at 27 per cent, India exports more than one-fourth of its GDP. A slowdown in global trade and exports is thus unlikely to leave India unaffected.

In terms of direct exposure to the US, as Table 1 shows,the share of goods exported directly to the US is 15 per cent of India8217;s merchandise exports. This is 2 per cent of India8217;s GDP. A recession in the US may lead to a global slowdown. However, some economists expect that China may either not see a recession or witness a small impact. In that case it is to India8217;s advantage that China8217;s share in our exports has risen rapidly in recent years and stands at 6.5 per cent today.

Table 1, however, refers only to the export of goods. Service exports from India in 2006-07 including remittances stood at USD 119 billion. At 13 per cent of GDP this is nearly equal to goods exports. Here the destination country is not documented in the export data, but it can be assumed that the bulk of it is to the US. If we look at that component in the Balance of Payments statistics that is typically counted as service exports and is found in the category 8220;Miscellaneous8221;, we see that software exports, BPO, financial services and communications accounted for USD 62 billion in 2006-07. India has no previous experience with large service exports combined with a slowdown in the US economy. It is difficult to predict whether Fortune 500 companies will send more work to India in an effort to cut costs during a US recession, or reduce work in India when their business shrinks. In 2006-07 exports from this sector amounted to nearly 7 per cent of GDP. Software exports stood at 3.4 per cent, and BPO exports at 2.6 per cent of GDP.

Put together this could imply that about 2 per cent of India8217;s GDP is directly affected by a US slowdown and another 7 per cent, that is, service exports, which have a high exposure to the US economy could be affected as well. A global slowdown would mean that many that other countries including China would witness a reduction in trade, and as a result the impact on Indian exports is likely to be much bigger.

In the coming months the major force behind trends in Indian exports is going to be the US and global story. In the past we have seen that changes in world GDP affect exports much more than small changes in prices. Trying to achieve a stable exports in such an environment through exchange rate manipulation or export sops will be futile.

The writer is senior fellow, National Institute of Public Finance and Policy, New Delhi