August 10, 2011

Is India a safe haven during recession?

With the recession talks all around us, the fear of another economic meltdown is slowly gripping the Indian public. Although, the third-world countries have seen an economic boom in the 21st century and a few of them have grown to a phase where they are listed among the largest economic powers of the world, the robust nature of the emerging economies are slowly vanishing and the economic scenario is rapidly changing. It's a worrisome fact that these countries, in many ways, are vulnerable to the economic turmoil in the international financial markets. The most probable impact will be a shortage of foreign capital to emerging markets.

It's here India and China stand tall as they look robust with a growth rate of 8 to 10 percent per year. The Indian market is said to remain attractive mainly for its structural factors such as the young population, improved economic policies and a large number of new middle class consumers. As domestic demand is the bigger driver of the Indian economy when compared to some of its peers in Asia, our economy is expected to remain the most insulated one in the coming future.

Economic experts suggest that India could become the global safe haven even if the economic downturn persists. "In the next months and in the medium-to-long run, there will be global capital in search of safe haven, we can become the safe haven that a lot of global capital will be seeking," said Kaushik Basu, Chief Economic Adviser. He also added that the thrust of the world economy will shift towards the eastern part of the globe including India and China.

The Federation of Indian Chambers of Commerce and Industry suggested that India will be impacted in the short term because of the U.S. debt crisis, but it will also benefit from the economic turmoil as softening crude prices will bring down inflation, prompting the RBI not to hike rates.

Reviewing the global economic situation and its possible impact on the country, Finance minister Pranab Mukherjee said that India's fundamentals are strong and the country is in a better position than other nations to meet the challenge.

As the price of crude oil and other global commodities are declining, the pressure on inflation is likely to ease. The stock market collapse on Monday was seen as a panic reaction to the S&P's downgrading of U.S. debt rating and an immediate policy intervention is not warranted at this juncture.

However, Indian Inc is confident about the fact that there will not be a repeat of 2008 this time and is hopeful of India's ability to cope. The Indian corporate are better prepared this time to withstand the negative impacts of the debt-ridden U.S. and European markets. IT, pharmaceutical, real estate and infrastructure sectors are expecting a slowing in growth and the companies are taking a wait and watch attitude with plan B's to cope with any adverse impacts of the possible global economic meltdown.

It's also reported that India will pitch for a significant upgrade of its credit rating by global rating agencies in an attempt to compensate the negative consequences in the market following the U.S. downgrade.

World's leading rating agencies Standard and Poor's and Fitch Ratings are expected to review India's rating mostly in November. India has a ranking of BBB- given by S&P, the lowest investment grade

However, rating agency Crisil said funding cost for Indian corporates are expected to become expensive following the downgrade of U.S. sovereign rating by S&P. The question remains to be answered if the emerging markets such as India can once again act as the pillars of global economy during the financial crisis.

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