Prospects of a $59 billion debt default by Dubai World, a sovereign fund, are roiling an international financial structure that has just pulled back from the edge. The latest shock to the global recovery will pass through India because of our economic exposure to the United Arab Emirates (UAE). The UAE account for 11 per cent of our exports and have directly invested $1.4 billion in the country till date. But this does not come even remotely close to capturing the terms of economic engagement. Indians working in the Emirates sent home approximately a tenth of the $44 billion that India, the world’s largest recipient, got as remittances in 2008-09.
Dollar flows from the Persian Gulf have a direct correspondence with Kerala’s foreign exchange earnings. Every third house in the state has a person working abroad, principally in the Gulf. Their loss of livelihood could be a double whammy. It would not only hit our exports but also crimp consumption back home at a time when India, along with the rest of the world, is trying to spend its way out of a crisis. Understandably, the rupee is taking a hard knock — it has tumbled more than most Asian currencies. The Mumbai bourse has not come in for undue punishment though because of the low exposure of Indian companies to Dubai’s construction bubble. The fall in the stock indices reflects a secular flight of portfolio investment to security and should reverse once the dust settles in the Gulf.
In fact, strong emerging economies like ours stand to gain once the dollar resumes its quest for higher returns. Last year’s financial crisis will serve to identify pockets of prudence amid the build-up in asset values across large parts of the globe. Dubai’s four-year real estate bubble, which saw prices crashing 50 per cent from last year, should work as a marker for the dollar (or euro) carry trade on what constitutes reasonable returns in emerging markets. India’s demand for physical infrastructure will also come up against fewer capacity bottlenecks if Dubai’s appetite for construction resources were to ebb. Finally, Mumbai’s claim to becoming a regional financial centre is perversely tied to the eclipse of the Gulf powerhouse.