Slowdown signals

Governments all over the world will naturally be worried about the slowdown in the US economy. It is the world’s largest, accounting for one-third of global economic growth. There will be an impact on India; of that there is little doubt. The question is only of where the impact will be felt and how hard it will be. If the US slowdown develops into a recession the effects will be a lot worse, of course, and recovery will take longer. Negative growth rates over two quarters count as a recession. While it is too soon to speak of a recession just now, the US economy is forecast to weaken further. So far, the best assessment is that it will register a zero to one per cent growth rate and start to pick up again only by the year end or early 2002. The highly unusual timing and the size of the chairman of the US Central Bank, Alan Greenspan’s interest rate cut this month would tend to confirm this scenario. That being so, India should anticipate the direct and indirect effects of a severe US slowdown thisyear.

The direct impact will be on exports generally and on the software industry in particular. The US is India’s largest trading partner and if US consumer spending continues to go downhill a number of newly successful export outfits are going to face hard times. The US absorbs 60 to 70 per cent of this country’s software exports and a majority of highly qualified professionals. Stock markets felt the effects very early on and as the Nasdaq deflated, Indian indices subsided and the euphoria went out of infotech stocks. Since then the air has also been sucked out of Indian dotcoms and there are more reports of close-downs than start-ups. This was inevitable given the overvaluations and hype. Software majors such as Infosys, who have been developing markets in Europe and Japan for some time, ought to be able to ride out the Nasdaq’s sharp fall better than others. Reports of venture capital becoming scarce are worrying. If young people are not supported and new ideas not incubated, it will be a major loss to theIndian infotech industry. In the new environment the government will have to work harder to attract foreign investment.

More difficult to predict is the indirect impact as a result of the effect of the US slowdown on other parts of the world. Take international oil prices. In the normal course lower US consumption should push prices down. However, fearing lower offtake Saudi Arabia and other members of OPEC are busy trying to cut oil output in a bid to raise prices and revenue.There are also some concerns about the stability of the global economic system if governments fail to respond appropriately to the new situation.East Asia made a rapid recovery after the collapse of 1998 essentially off the back of strong US economic growth and without completing reforms of financial sectors. There is some doubt about how well the region will be able to weather a sharp drop in US demand and investment. Japan’s economy is not expected to make up the slack and although European growth will continue it is thought it will grow at a lightly slower pace. There are many uncertainties. The upside may be that the fundamentals of economics are appreciated once more and wishful thinking has gone out of the door.