THE OTHER day, my friend expressed concern about the US economic slowdown affecting India. He, like many others, based his fears on two factors. One, the slowdown in the US economy will result in lower export of Indian goods and services to that country, thereby slowing down the Indian economy. And two, the US slowdown will hurt the Indian stock market, forcing people to cut their demand for goods and services.
But are such fears justified? Not entirely. Consider this. There is a huge domestic demand for goods and services. This means exports do not contribute substantially to India's economic growth. In any case, India exports to many countries apart from the US. A US slowdown does not, therefore, automatically mean a sharp drop in Indian exports.
Of course, that does not mean that a slowdown in exports to the US is not a cause for concern. If nothing else, exports are important as it provides us forex to pay for our imports. But the important point is that we do not depend so much on exports for economic growth as do, say, economies in South-East Asia. While globalisation will ensure that the economy will be affected, the impact may not be large enough to cause a sharp slowdown.
But what about the negative impact on the stock market? Our stock market thrives on tech companies, all or most of which derive a substantial proportion of their revenues from the US. The US slowdown will, therefore, hurt the tech stock valuations.
But will fall in equity values force people to cut down their current consumption, thus, slowing down the economy? Not really, because only a small proportion of Indian households invest in the equity market. Fall in equity values will not, therefore, bring down income levels forcing people to cut demand for goods and services. In short, fears that the US slowdown will cause great harm to the economy can be, at least for the present, put to rest.
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