Double Dip: The likely impacts on India

In one of my previous blogs I wrote about why double dip was a possibility in the US? Now after the S&P downgrade of the US debt, it seems that the sentiments have really turned for the worse though fundamentally things haven’t changed a great deal. But what if the double dip materializes and what lies in store for India if US is engulfed by the economic crisis? Let’s discuss them. 

The following could be some of the likely impacts on the Indian economy:

The exporters would have a tough time - The crisis could see reduction in demand and weakening of the dollar which would work against the exporters. Also IT stocks may have a gloomy future; one may argue that cost-cutting will be on the minds of the US corporates (if it wasn’t already) if crisis strikes so it may lead to more business. But given the state of unemployment in the US, protectionism is likely to find favor at least among the political class. 

The Indian stock markets will witness volatility and head downwards - Considering the sizeable impact of the FIIs on the Indian indices and the flight of the capital towards safer havens (read debt, gold) or towards covering losses elsewhere, one could witness a major sellout which could tank the markets. This article details an interesting irony of the S&P downgrade. 

Investment climate won’t be suitable – While FII and FDI have been giving thumbs down to India off-late as the article shows but things were looking up e.g. the Bain India PE 2011 report says that India saw the largest increase in deal activity among the big Asia-Pacific markets in 2010 as the last year’s total deal value more than doubled from that of 2009 to US$9.5 billion. But with the investors looking for less risky avenues, it could lead to limited availability of funds for PE/VCs. For corporates increasingly relying on FCCBs, raising capital would become tougher. 

But as they say “every cloud has a silver lining” so we can witness some developments that can positively impact the Indian economy:

The inflation may ease out – The crude is already on the way down and OPEC has cut the demand forecast for the coming year. We all by now are aware of the spiraling effect that oil prices can have on prices of other commodities. Isn’t it? This could provide a breather to those who have been affected by the ever increasing interest rates. Reduced demand in the US could deflate commodity prices as well. Weak dollars can make our imports cheaper

Decoupling theory notwithstanding, India remains reasonably isolated from the global economy given that it relies on internal demand rather than exports. Thus it may escape with minor injuries if a global crisis becomes a reality. But India has bigger problems to solve and unfortunately most of them were avoidable and are self-created. The list includes corruption, policy drawbacks, supply side inflation etc. These have resulted in Indian growth story losing its momentum. A strong Indian economy could have used this crisis to emerge as a leader in the new world order but alas it was not to be! So the Indian story remains a case of missed opportunities rather than spooked by external factors.