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Why America chill gives Sensex the shivers

If this week’s bloodbath in the stock market are any indication, the road ahead will not be without bumps, reports R Mahapatra. Sensex recovers

business Updated: Jan 24, 2008 02:17 IST
Rajesh Mahapatra

A recession in the United States appears inevitable, and that’s not good news for us. If this week’s bloodbath and wild swings in the stock market are any indication, the road ahead will not be without bumps.

From billions of dollars in outsourced work to big-ticket jet deals, India’s economic linkages with the United States have grown rapidly in the past decade, and it is unlikely that this country can wish away any spillover from the financial turmoil in the world’s largest economy.

That said, the longer-term India story remains intact and any fallout of the US recession would be more of a blip.

<b1>The broader economy may lose between 1 to 2 percentage points in GDP growth next fiscal year, depending how far the crisis spreads, and Indian companies -- especially those with growing global footprints – could see some new pressure on their profitability, economists said.
Stocks may have to wait longer to return to the days of fancy returns, while the hardship faced by exporters might last longer as the rupee hardens further against the dollar, they said.

"The US economy is headed for recession with severe consequences for India and other Asian countries," said Peter Morici, a professor at University of Maryland.

The Indian government has for sometime downplayed any impact of the trouble in the US, which precipitated with bad home loans digging big holes in the balance sheets of some large banks.

But on Wednesday, Commerce and Industry Minister Kamal Nath admitted that wasn’t the case. "No economy can totally decouple itself from the US," he said the World Economic Forum’s annual meeting in Davos, Switzerland.

The first signs surfaced in the stock market earlier this week, with the Sensex shedding nearly 13 per cent in just two trading sessions, weighed down by global jitters.

On Wednesday, the market bounced back after the US Federal Reserve cut its key rate by a surprise 75 basis points, stoking optimism that more money could plough into equities in emerging markets. Analysts, however, say the mood in the stock market may not stay upbeat for long.

"Not many are convinced that authorities in the US have done enough to ward off a recession," said Robert Prior-Wandersforbe, a Singapore-based economist at HSBC. The Bush regime has proposed a $150-billion bailout package in tax cuts so to boost demand, but Prior-Wandersforbe said such measures often have a lagged effect. “I don’t see the effects until the later half of the year.”

What happens to the US economy, which accounts for a quarter of the world GDP, is critical as how the Americans spend, save and invest has a bearing on the rest of the global economy.

India’s case is somewhat better because exports to US make up a little more than 3 per cent of GDP and its real economy has not seen any devastating impact of a financial turmoil in the past.

"The real question is what is the link between the financial sector and the real economy in today’s context,” said Pronab Sen, Chief Statistician in the Government of India. "I still have no evidence that wealth effect matter much to the real economy in the Indian context.”