Impact of US Recession on India

A recession is a decline in a country’s gross domestic product (GDP) growth for two or more consecutive quarters of a year. A recession is also preceded by several quarters of slowing down. It normally takes place when consumers lose confidence in the growth of the economy and spend less. This leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment. Investors spend less as they fear stock values will fall and thus stock markets fall on negative sentiment.

As the cliché goes, whenever the US sneezes, the world catches a cold. This is evident from the way the Indian markets crashed taking a cue from a probable recession in the US and a global economic slowdown. Jobs cuts, lay offs and cost cutting measures are the major worries of the Indian masses as they feel the early effects of a looming recession over their heads.

Outsourcing, one of the biggest strongholds of the Indian economy, is going to be hit badly. The IT sector which generates 75 percent of its revenues from the US is probably going to be the worst hit. India’s exports to the US which have grown substantially in the past years are also expected to fall. It is estimated that the Indian economy is likely to lose between 1 and 2 percentage points in GDP growth in the next fiscal year, and worries for exporters will grow as rupee strengthens further against the dollar. The Sensex saw a major shift towards the negative side when it started slipping points from a record breaking 21000 points ending at less than 9000 points. But experts note that the long-term prospects for India are stable. A massive population fuelled by growing domestic demand for goods and services is expected to embrace the Indian economy from a major impact. A weak dollar could also bring more foreign money to Indian markets thus aiding the growth of the economy.

Striking back

The service industry will be the worst hit among all the sectors. BPOs, KPOs, ITeS and other services provided which contribute more than 52 percent towards the GDP growth in India will see a decline. On the contrary, NASSCOM estimates that India will have a shortage of about 5 million skilled people in IT/ITeS which would counteract examples like TCS firing 500 employees due to cost-cutting measures.
K. Ramachandran, Head, Advisory desk, BNP Paribas Private Banking, says Indian companies will have to adopt a multi-pronged strategy, which includes diversification of the export markets, improving internal efficiencies to maintain cost competitiveness in a tight export market situation and moving the product portfolio up in the value chain to impart resilience.

Conclusion

While on one hand we have some parts of the economy affected, on the other, the slow pace of financial reforms taking place in India, regulations towards foreign investments in different sectors and a number of bureaucratic hurdles have actually turned the tables in India’s favor. The recession presents us with a unique opportunity to analyze our own strong as well as weak points. India’s huge population base and a growing domestic demand is one of the contributing factors towards withstanding the effects of the recession to a great extent. It is time we start thinking out of the box and be more innovative to go about the cost cutting in a systematic manner to balance the effect of the rupee.

By Shiladitya Lahiri