Pearl Harbour redux

When US hurts, world will feel the pain

It is one of the costs of globalisation that a crisis in one part of the world will impact many other parts in both predictable and non-predictable ways. It would be an exaggeration to say that India would be directly hurt by the terrorist attacks in the United States, but it would be equally incorrect to underplay the likely effect of the fallout. Predictably, the terrorist strikes in the US have triggered turmoil in financial markets around the world, which might adversely impact the Indian economy. Stock markets nosedived and oil prices flared up as the dastardly attacks destabilised global markets, raising fresh fears of a world recession. With India’s GDP growth slowing to 5.2 per cent in 2000-2001, the threat of a global recession can constrain policies aimed at kickstarting India’s recovery. India’s policy makers correctly feel that more time is necessary to assess the impact of the US developments. According to finance minister Yashwant Sinha, there will be no direct impact on the economy — either in terms of costlier oil imports of oil or the rupee over the immediate term. It bears mention that a “degree of deftness in the design of macroeconomic policy framework” (to borrow an expression of the Reserve Bank’s latest Annual Report) has so far been successful in stemming the impact of the global slowdown. India also escaped contagion from the Asian financial and currency crises of 1997. But can it escape the repercussions of Pearl Harbour redux on September 11? Although the Indian economy is less open, it is far from insulated from what happens to the most powerful economy in the world.

India’s stock prices thus plunged by more than 100 points as an immediate reaction. The slowdown in US GDP growth — reflecting the bursting of the tech bubble — has also affected the export prospects of India’s information technology industries. Thousands of software engineers of Indian origin in Silicon Valley have been laid off. The negative sentiment sparked by the terrorist attacks can tip the US economy into a full-blown recession. The possibility of that happening is one reason why the International Monetary Fund has cut its global growth forecast to 2.7 per cent for this year.

Recession or no recession worldwide, India’s recovery is problematical as it will not be able to export its way to faster growth. A quick-fix solution of letting the exchange rate depreciate sharply to make exports cheaper also may not make much of a difference as world trade volumes are expected to shrink sharply. The slowdown in India’s growth thus might only intensify because of deteriorating conditions on the external front, set off by the US terrorist attacks.