The S&P downgrade of the US rating and the subsequent bloodbath in the global stock markets have had more than a commensurate impact on developing countries? stocks, including those in India. And to make matters worse, unlike the 1998 crisis, when India was growing at peak levels, the current crisis has caught the country on the wrong foot with the government stuck in a policy quagmire and distracted by scams that are breaking out all around, even as growth has been steadily decelerating, partly in response to the hard monetary stance of the central bank.
But too much pessimism is unwarranted for a number of reasons. Developing countries like India, where growth is largely anchored on domestic markets, have far fewer reasons to panic on account of global trends. Though inflows into the country, and especially into the stock markets, may suffer to some extent and impact business sentiments, the fundamentals of a strong economy are unlikely to be severely hit. This is especially so since most of the savings and investments remain outside the realm of the stock markets.
Though a dip in the global growth rate will impact India?s exports of both goods and services, the impact will be varied. A sharp deceleration in the US markets may initially impact software exports. But the demand for more cost-efficient services will propel back the demand in the medium term. Similarly, in the case of goods, India?s trade has shifted substantially to Asian markets, which will cushion the impact of a downswing to a very large extent.
