‘Impact of a US slowdown on the Indian economy will be within limits’

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: There are signals of slowdown in the US economy: high unemployment rate, falling real estate prices and huge credit defaults and to offset this, rate cuts by Federal Reserve as expected. Due to this slowdown, the Indian economy is also feeling the heat as in China and other emerging countries through greenback outflows and also slowdown in growth. Rahul Jain of FE Investor spoke to Prashant Kothari - fund manager, ICICI Prudential AMC, on the impact of slowdown in the US on India’s growth. Excerpts:

Which sectors in India do you think could get affected and benefit due to the US slowdown?

Sectors like IT could be affected by a US slowdown because of its export-oriented nature. Sectors like metals, petrochemicals could also face some implication on account of overall demand supply issues i.e. demand will reduce, bringing down the prices. As a result their revenue margins and profits may come under pressure. On the other hand, companies with inputs of metals and petrochemicals will benefit because of lower costs.

Ideally there are many reasons cited for the US slowdown. What has gone amiss for the US economy?

The US economy is primarily a credit-driven economy sustaining on borrowed capital. High consumption and low savings characterise the economy. This predominant behaviour led to credit being extended to borrowers who did not have the capacity of repaying, resulting into high default rates. This translated into losses for the financial system, leading to the current scenario of an economic slowdown.

To what extent is the Indian economy insulated from the US slowdown, considering the general opinion that the domestic economy is booming?

The economic impact of a US slowdown on the Indian economy is expected to be within limits i.e. less than 1% impact on GDP as forecast by economists. This is supported by the fact that the growth being witnessed is not as much from export-oriented sectors, and that the Indian economy is consumption-based driven by domestic demand and supply. This is substantiated by the fact that trade is comparatively a smaller part of the GDP.

Further, the economy is also adequately prepared for any capital outflows due to large foreign exchange reserves ($275 billion), high CRR and MSS. Taking into account all these factors it could be a fair assumption that the Indian economy is relatively decoupled from the US economy to some extent in the long term.