November 3, 2008

Forgive me if I sound like a fear monger. But reality is dawning and India may soon be hit hard by a severe economic downturn notwithstanding the assurance by government officials. Most likely a number of economic realities of India will have a multiplier effect leading to a painful economic period for India.

Let's look at some of the triggers that could derail the grand economic momentum of India in the short run.

Acute slowdown in IT, ITES & BPO sector - Over the last 5-6 years, Indian IT & ITES sector has seen explosive growth and have managed to put a global footprint of their prowess. To service the ever growing demands from international markets, companies mushroomed in every nook and corner of technology centers like Bangalore, Hyderabad, Pune, Chennai, and Noida. The demand mostly came from banks and financial institution in US and Europe. With current global financial crisis, suddenly the financial power houses across the world are on their knees begging for survival. And with this, the fortunes of Indian IT & ITES sector in all likelihood would take a beating, at least for a few years. Since, the crisis is global in nature and not only confined to US, even firms who had strategically decoupled themselves from US economic health by finding clients in other markets of the world would not be spared.

Slowdown in Export - With imminent economic recession in US and some other economies of the world, Indian export industry is bound to suffer. Over last few years, Indian firms have established themselves as suppliers to many leading global retail chains. With slowing of consumption in developed economies of the world, these export firms will definitely experience turbulent times in the short run till world economy recovers. It has been reported that a few textile export houses in India have retrenched workers due to slowing demand.

Pay cut, pink slips and domestic consumption - With turbulence being experienced in IT & ITES, Export, Real Estates, and Banking & Financial institution sectors, pay cut and pink slips are expected in the next 3-4 months. When an economy suddenly applies break to slow its growth rate from 9% to 7%, some contraction in employment sector is inevitable. This is going to seriously affect the domestic consumption due to lower disposable income. This in turn has the potential to affect consumption of a wide spectrum of goods and services.

Loan and credit card burden - Explosive growth and resulting economic prosperity in last 4-5 years has seen a steep increase in disbursal of loan and usage of credit card. Many youngsters, particularly from IT, ITES, Banking, Insurance and other financial services sectors, who smelt money at the very start of their career without much pain have taken loans to finance their houses, cars, vacations, et al. Credit card culture, particularly among youth, too may turn monstrous in current scheme of things. With pay cuts and pink slips, the perceived never ending rosy outlook is soon to deal a major shock resulting in major loan defaults across the board. This is going to drastically affect banks and other financial institutions who loved to dole out loans and credit card to everyone on the street irrespective of the capacity to pay back the loan. Similarly, housing loan defaults may create more turbulence for already troubled real estate sector.

Stock market crash - In last 10 months, Indian stock market has crashed by over 50%. I think, in the last couple of years, a good chunk of domestic consumption has been driven by fortunes made from stock market, where prices doubled every 6 months or so! The sudden crash has resulted in heavy loss to many small time investors who entered late. With the fortunes of the stock market not expected to change in near future, an easy money making machine is out of bounds. This will play its own little part in slowing down domestic consumption.

So, the writing seems to be on the wall. A chain reaction is waiting to happen in near future. But a looming election season is forcing the gatekeepers of our economy (read Prime Minister, Finance Minister, and Governor of RBI) to ignore the warning signals and pooh pooh any talk of adverse impact of global economic slowdown on Indian economy. A more responsible behaviour would be to do some scenario planning and draw a pre-emptive crisis management plan to lessen the adverse impact on Indian economy.