A partial shutdown of US government activities on several fronts may hurt Indian exports, potentially causing billions of dollars of foreign exchange to be lost in earnings.
While currency and equity markets remained firm on Tuesday, the Indian business community is keeping a close watch on developments in the US that followed the failure to pass a stop-gap spending bill before the new fiscal year began on October 1.
This immediately halted work at several government agencies and non-essential state-run programmes, for the first time in 17 years.
A prolonged outage can hurt India’s exports as the US is among the topmost buyers of Indian goods and services. It can worsen the current account deficit (the difference between dollar inflows and outflows) adding to the array of problems for the embattled Indian economy.
Trade facilitation activities such as ports, cargo and regulatory clearances could be the first major casualties as non-essential government services came to a grinding halt in the world’s largest economy.
Analysts cautioned that a long-draw out stoppage can eventually reverse the incipient recovery in India’s exports as shipment orders from the US remain on hold.
The resultant fall in exporters’ earnings can potentially weaken the rupee further and upset plans to contain the CAD at 3.7% of GDP or $70 billion from the record 4.8% of GDP or $88 billion hit last year.
It stood at 4.9% of GDP or $21.8 billion during April-June this year. The gap, however, was expected to slim down in the coming quarters aided by a sharp slump in gold imports and a smart rebound in exports.
“If it (the shutdown in the US) continues for a few weeks, exports to US may take a $2-billion hit,” said Madan Sabnavis, chief economist, Care Rating.
“In the absence of the essential trade facilitation, buyers may put on hold new orders,” trade body Engineering Export Promotion Council (EEPC) said in a statement.
“The shutdown of the US government will certainly hit Indian exports because of crippling of the trade facilities at ports and airports,” said Rana Kapoor, president, Assocham.
The government, however, played down the probability of a major impact of US shutdown on the Indian economy.
“We hope the impasse will be resolved so that there is no spillover to the global economy. As of today, I don’t see any major impact on the Indian economy on that account,” Arvind Mayaram, economic affairs secretary, said on Tuesday.
At $36 billion, US accounts for 12% of India’s total merchandise exports. India’s IT companies earned $40.5 billion by exporting software services to the US - 58% of their total global exports - although a majority of it was from private clients.
“A majority of the business that our industry has is with the private sector, and is not directly dependent on federal spending. Hence we do not see an immediate economic impact,” said industry body Nasscom. “If, however, the shutdown continues for an extended period, there will be an overall macroeconomic impact that may affect the industry. Some services such as visa processing time that depend on federal budgets are expected to see delays.”
“There is no short-term impact. But a prolonged shutdown can upset the economic recovery, which is a matter of concern,” said Ganesh Natarajan, vice-chairman and CEO, Zensar Technologies.