A slow down is not a recession

Don't P A N I C

Ninad Dhirubhai Sheth

Confidence is the key. In cricket, when you are low on that critical element, the same shot that got you those spectacular no one moves boundaries result in inglorious caught behinds. The Indian economy is somewhat a similar mood spell. Fundamentals are intact. On almost all parameters including saving rates, investment rates and domestic spending the country is better placed then the US Japan and Germany the three economies which have fallen into a recession. Yet the mood is one of fear. Look around and you see a country low on confidence. The economic crisis globally has induced a scare in India. It is amazing that so many are worried so much by the global crisis even as the economy itself grows apace. It is as if we are determined to talk ourselves into a recession. Go to the ministry of finance and you see nervous bureaucrats scurrying around trying to understand the impact of the global crisis. In Mumbai big firms - the Tata's included - are communicating with staff asking for belt tightening, giants like L&T are cutting back on grand ship building and realty projects. And the airlines, well that's too well documented to be detailed. Thus the fear of recession is writ large in today's corporate India. But is there really a recession? For one thing the classic definition of recession a - shrinking economy for two consequent quarters – simply does not imply to India. The economy grew the last two quarters - albeit at a marginally slower pace. Comments Surjit Bhalla, Chairman, Oxus investments, a noted economist, "We do not have a recession in India. Sure, the global recession will lead to a growth downturn however it cannot be called a classic recession. Look at the realities, inflation is back in single digits and oil prices have halved. Thus we have more elbow room now. " A Standards and Poor's report recently commented that countries like India are less likely to be impacted by the global downturn since their exposure to global trade is marginal when compared to their domestic consumption.Says Pavan Jain CMD, of safexpress, a logistics firm, "There certainly is an economic slowdown, but to call it a recession would be a statement made too soon. As compared to what the other countries are facing we are still in a better position as our banking structure is not as influenced as the western countries. We can call it a spill over effects of the global financial meltdown. More liquidity is coming in to the system and this will help we need to reduce fuel taxes and bring the price of petrol down and lastly the domestic consumption is still a growth story so overall I think we should just concentrate on the basis and results will come." The first bright spot for the Indian economy is the foreign exchange cushion. With nearly $255 billion put the country in a far better position when it comes to measures such as recapitalization of banks and providing support to the rupee. The Software sector that is depended on the external markets is still very much in vogue due to economic arbitrage being in India's favor. With the recent fall in the rupee the InfoTech sector has remained competitive. Firms with size, such as Wipro and Infosys can bet on bigger contracts since the pattern in the rich world is to outsource more - not less - in a down turn. The three large Indian IT firms together hold in access of $500 million in cash reserves. This will allow not only for adjustment s during the downturn - but also overseas acquisitions at the right price since firms in the west are looking good at current valuations. Agrees Raman Roy BPO veteran and chairman of Quattro an IT consultancy based in Gurgaon, "India is a part of the solution of the global crisis not a part of the problem. The US cost structure in a recession predicates further outsourcing. They have to cut costs there not add them. As for India, our dependence on the US market while significant is not absolute. In India there is a growth slowdown that can not be termed as a recession. " A report brought out in October 2008 by Everest, an IT consultancy points out that in fact this quarter and the next will see robust outsourcing orders for larger Indian IT firms from the US should Indian firms manage their cost structures in a correct manner. The state of Indian banks is the third redeeming factor in India's favor Vis a vis the global slowdown. The health of Indian banks is also much better in comparison to their global counterparts. What the US is now doing by taking stakes in big banks, is a matter of course in India. This has helped develop buoyancy. It was reported by the Reserve Bank of India that as much a half a billion dollars came into the NRI bank receipts in September 2008 alone. While some sectors such as banking and export firms have fired a record number of people it is not a sea of pink slips out there. Says Ashutosh Khanna, Partner Korn Ferry, a leading global recruiter "Look, jobs are out there for many sectors. Look at Unilever they grew by 16% last quarter. Sectors such as telecom and consumer durables have picked up and there is robust demand for quality professionals in these. Entertainment too is growing bear in mind that when times are bad sectors such as the liquor industry and entertainment have historically done well. We see a continuing trend of growth in these sectors of the economy." So while there may be a roll back on those fat pay checks the spa as a fringe benefit may not be on offer if you are good enough jobs are still around in many sectors. It's all about Money Globally the crisis is about sourcing money to fund the running of business and supporting business expansion. Here India is on a sounder footing. The RBI is expected to cut lending rates by at least 2 percentage points in the current quarter. This will see an infusion of nearly 80,000 crore of liquidity into the Indian market. What that does is restore confidence among lenders, among entrepreneurs and among corporations - the holy trinity that drives the Indian growth story. With the infusion of cash will also come the peripheral advantages such as new projects and strengthen infrastructure spending on new roads, electricity plants, ports and so forth. This can have the crucial multiplayer effect for the economy. The lending rate is the catalyst to pull a country out of the bad times. Says Ajay Relan of CX partners, an Investment Bank," A dramatic rate cut will certainly help in kick starting the economy, bringing it back on track. However India cannot afford to be complacent. India needs to channels its record level of savings into productive assets. We can no longer afford the ghastly cost overruns in infrastructure projects and so forth." Clearly to ride out the storm India needs to ensure that its tardy abilities at project execution are replaced by a vigorous new approach. We may create new money but it is much harder to create opportunities where that money is spending productively. Taken together, domestic consumption, easier lending rates, entrepreneur culture and robust foreign exchanges can come together to lift us out of what are bad - but not horrid times. As in Cricket so for the Indian economy – stick around this could yet be fun.

interview with Steven roach Morgan Stanley

Steven Roach is chief economist and managing director of Morgan Stanley worldwide. He has more than three decades of experience in economic forecasting, economic policy and the global financial markets. His responsibilities include overseeing the entities gamut of financial and economic research by Morgan Stanley, including country indexes and other financial forecasting products. He spoke to Ninad D Sheth on the global economy, its growth and weak spots:

The global economy is on a roll. There is growth everywhere.

Yes. The US, the primary engine of the world economy, had a very robust year, China grew officially at 9 per cent but in my view it was more like a whopping 12 per cent, India notched double digit and even Japan of all places had 4 per cent. Only Europe seems to have forgotten how to grow but still managed 1.4 per cent. There is an upswing. The issue is whether this is sustainable. There are too many fundamental gaps leading me to question the ability for the world’s leading economies to sustain growth.

How serious is the US deficit as a source of global financial instability on a 1 to 10 scale?

The US deficit is a serious, but secondary, issue. I would rate it 6 on 10, however, the dismal US savings rate is the largest single cause of worry for the global economy. This is 9 on the 10-point scale. The shopping addiction of the US household, which fuels a large part of global growth, is unsustainable and needs to be urgently tackled. US savings rate is at a historic low.

Is the Bush administration concerned?

Unfortunately, the administration is moving in the opposite direction. The tax cuts and the fact that there has been no movement on the interest rates combine to make a dangerous blend. Indeed, there is no appetite currently in Washington for a correction. The overriding theme seems to be to continue with the tax cuts and not allow for a rise in the interest rates. The only way the US can grow is to get capital from abroad. Thus, with so much money coming from foreign lands, there comes a point when this financing becomes unsustainable.

BPO has emerged as a major US issue. What is the worst case scenario likely to be?

I sincerely think the worse is behind us in the BPO backlash. The jobless recovery happening in the US is the real cause of this backlash fanned by populism in an election year. I do not think we can blame the layoffs to outsourcing. However, there is no doubt that outsourcing will hurt net new job creation. To stem the flow of outsourcing through government-sponsored incentives would be a very expensive choice.

So is the Bush administration committed to free trade on this issue?

George Bush is committed only to one thing, re-election. If he sees his numbers slipping, there is no preventing an about-turn on the outsourcing issue. The administration is currently in combat mode for re-election. This is not an issue of ideological commitment to them at all. He changed his mind on steel and went protectionist. He can do it on the outsourcing issue as well.

So should India worry about a protectionist phase in the US?

Yes, it should. However, China has much more to worry on this. Already, there are two very significant Bills in Congress with bipartisan support that attack China. China is an obvious target because of the incredibly huge trade surplus that it has with the US. However, should push come to shove, India with the attendant issues of outsourcing could become a victim of politics scoring over economics? The real problems are domestic — in the low savings, the poor education. But it is human nature to blame someone else for one’s own problems and this is exactly what is happening in the US.

How is India placed to leverage the labour arbitrage?

India is well placed, perhaps, in the best position as far as the outsourcing opportunity is concerned. It has a brand equity as well as ground strength in knowledge workers. These are well- educated people with a high motivational level and well-connected globally in cutting edge IT sectors. With a conducive environment, India can use this to immense benefit.

You are an old time China watcher. As the Indian economy takes off, what are the lessons India need to learn from the Chinese miracle?

The Chinese have a very powerful growth model. It is based on a currency pegged to the dollar, complete emphasis on infrastructure for manufacturing and a very business-friendly environment for foreigners. India, even today, lags on the last two counts and need to sort it out for a sustained bull run.

Do you see China devaluing her currency?

No, I don’t. What they will do — and some of this has already begun — is to tighten the credit in the economy and cool it down a few percentage points. A lower growth rate of 9 per cent will help China and I think there are other creative solutions — not devaluation — that the Chinese will opt for.

And the dollar?

I think that it will slide more. The fundamentals point to a much lower value for the dollar.

Is Morgan Stanley bullish on India?
Yes, we are. We believe that India is a real opportunity.