The global financial crisis of 2008, precipitated by the collapse of Lehman Brothers, was a traumatic experience for the entire world. Concerted action by the G20 countries contained the problems and brought about a semblance of normality in 2010. However, the underlying problem of excess debt in the advanced countries remained unresolved. It has gradually morphed into an escalating crisis of sovereign debt, in Europe and the US.

In the US, slow growth (1-2% per annum), compounded by reduced government spending, could lead to a recession. In Europe, Greece, Ireland and Portugal are already in a debt crisis. Italy and Spain are also under pressure. One or more of these countries will soon have to restructure their debt or default, leading to a chain reaction impacting lenders and other governments. The breakup of the EU is no longer ruled out. The alternative to a split will have to be a tighter fiscal union. This choice is putting enormous stress on the political systems. The next global financial crisis is likely to emerge from a default event in Europe. What impact will it have on Indian firms?

India?s experience during the economic slowdown in 2008-09 provides some useful pointers. Broadly, a recession or a major disruption in the advanced economies will impact us as follows:

Foreign trade: The developed nations (the US, the UK, Europe, Japan) still account for 34% of India?s merchandise exports and 30% of imports. Any slowdown in demand will thus affect a third of our exports. While this will adversely affect our economic growth, the impact would have been far greater in earlier years.

Financial flows: India runs a current account deficit of 2-3% of GDP. Hence, foreign fund flows (FII, FDI, ECB etc) are crucial for the economy. The advanced economies still account for about 78% of the pool of global financial assets. Hence, any crisis in their financial markets that slows or disrupts the flow of capital can cause havoc in India in terms of exchange rates, liquidity and trade credit.

Crude and commodity prices: Commodity prices are likely to plunge in the event of a recession or crisis in advanced countries. This would be beneficial for India as we are a major importer of most commodities.

Economic growth: India?s economy is driven by domestic consumption (67%) and investment (35%) with the external sector having a negative contribution. Most investment is funded by domestic savings?the gap being about 2-3% of GDP. This makes our economy more resilient to external shocks. At present, India is experiencing high inflation and a high fiscal deficit. Monetary tightening is under way to control inflation. Economic growth is likely to moderate to about 7.5% in FY12 and FY13. As inflation declines to an acceptable level and interest rates are reduced by RBI, growth will rebound to over 8% in FY14. A global financial crisis will have an adverse impact through reduced growth in exports and drying up of foreign currency flows. This will be partly offset by the benefit of lower prices of crude oil and other commodities. The net effect is a downside risk of about 1% GDP growth reducing it to about 6.5% to 7% in FY13. This is consistent with 2008-09 when GDP growth dropped to 6.8%.

What does this mean for Indian business? Firms have to be ready for a more difficult environment.

Advanced countries are likely to have slow growth (1-2% per annum) for an extended period of time. Hence, international expansion and export growth will have to focus on emerging countries, for example in Africa, Southeast Asia and South America.

In case of a financial dislocation emanating from, say, Europe, the greatest risk comes from any friction or disruption in financial flows. In such situations, cash is king. And having stand-by domestic banking arrangements and a low or prudent level of debt can safeguard operations.

Firms in developed countries, facing low or uncertain growth in home markets, will be compelled to target emerging countries, especially India, for future growth. The intensity of competition in India will go up several notches.

India?s GDP growth will moderate in the next two years. With capacity additions in the pipeline in most sectors, and greater competition, there will be intense pressure on prices, market share and profits. The profits of the corporate sector may drop for a year or two as happened in FY09.

Incumbent firms need to urgently revive programmes to reduce costs/improve performance and enhance revenue/margins. Strategic sourcing can play a key role in dealing with volatile input prices. Concurrently, new customer segments (for example rural), route to market initiatives and sales force effectiveness programmes can expand market share and profits.

The government of India and RBI have a crucial role to play in mitigating the impact of a global crisis and keeping economic growth on track.

They need to monitor and ensure liquidity in financial markets even if there are huge outflows by FIIs or for repayment of foreign loans. This is potentially the most critical need in the event of a financial crisis.

As crude oil and commodity prices drop, inflation will reduce. Also, the subsidy burden and fiscal deficit will drop. This may justify a steep reduction of policy interest rates to start the next growth cycle in India.

The next few quarters are likely to be turbulent and unpredictable. In a situation of such uncertainty, firms need to stress test some of their major bets, investment intentions, acquisition/divestment plan and directional changes against some of the extreme scenarios in the domestic and international markets. The initiatives that are more ?at risk? should be avoided, deferred or altered. These steps will help firms tide over the expected financial tsunami and position themselves advantageously for the subsequent rebound in India?s economy.

The author is chief executive, Tata Strategic Management Group