Bad News for India? It Depends on the Policy Response

So far, I have been quite sanguine about India’s growth prospects, even in the face of the United States’ deepening financial crisis (or, more accurately, the uncovering of the already deep crisis). The continuing hemorrhaging of financial firms, however, is likely to cut into key Indian export markets. An article in the Mint, “Fall of US finance giant casts shadow on IT firms,” describes the problems.

 

The crux of the problem is this:

“According to industry lobby group Nasscom, the banking, financial services, insurance, and telecom sectors account for at least 60% of Indian IT firms’ revenue.”

 

IT leaders in India were harder hit than the overall market:

“On Monday, shares of TCS fell by 5.74% to close at Rs761.80 each; those of Infosys fell by 4.24% to close at Rs1,574.40 each; those of Wipro fell by 4.16% to close at Rs402.30 each; and those of Satyam by 9.45% to close at Rs368.15 each. The Sensex fell by 3.35 % to close at 13,531.27.”

 

There was a more optimistic view:

“Diptarup Chakraborti, principal analyst at research firm Gartner, said: ‘I don’t think Indian IT firms will be that badly affected, since these big, global financial organizations depend more on IT biggies like IBM.’”

 

But the pain of the US financial sector is going to be widespread, not just restricted to the big broker dealers and mortgage lenders. So I think this is going to take a little something off of India’s growth rate, unless…

 

…India’s policymakers act boldly. Paradoxically, perhaps, when there is all this talk of a global financial crisis, India has a great opportunity to seize the day: financial sector reform, as chalked out in the Mistry and Rajan reports, would be a huge boost for the Indian economy. The fall of the giants is a perfect time to grab market share in whatever niches that India can reasonably compete in.

 

There is also an enormous opportunity to boost domestic demand for IT products and services. A massive empirical study I co-authored with two (brilliant) Indian economists, Shubhashis Gangopadhyay and Manisha G. Singh demonstrates that there are substantial productivity gains to be reaped through the diffusion of IT among Indian manufacturing firms. This second point illustrates why the West-centric talk of another Great Depression-like crisis is wrong: the domestic markets of China and India provide a source for growth that is relatively insulated from the slowdown in the West. The catch-up story is based on moving to the technology and organizational frontier – there was nothing like this going on in financial crises in the last hundred years. One should also not forget the safeguards against trade wars and the better understanding of macroeconomic management we have now.

 

To finish the IT story, investment requires the right policy environment, so, with the last month’s WPI inflation down to about 4 percent at an annual rate, the RBI should be easing up a bit, or signaling a change in stance.

 

In sum, despite the deepening gloom in the US, there is hope for India, if the policymakers act decisively and accurately.