Coupling conundrum

Has the Indian Economy really “decoupled” from that of the US? Economists remain divided on the issue. Based on the data for industrial production and GDP growth, some economists said the Indian economy had “decoupled” from that of the US, but this theory was quickly abandoned when the Indian stock market lost close to 15 per cent from its peak of 21,206 on January 10, 2008 and closed at 18,115 on February 15 following the announcement in the US of a $168-billion (Rs 6,72,000 crore) economic stimulus package last month and a further cut in the Fed rate that brought short-term interest rates in the US down from 5.25 per cent in September 2007 to 3 per cent now. “To say the Indian economy has decoupled from the US economy is very simplistic,” says Rajesh Mokashi, Executive Director, CARE.

A look at the foreign exchange inflows in the post-liberalisation period bears out Mokashi’s scepticism. FIIs have brought in $62 billion (Rs 2,48,000 crore at current rates) and another $40 billion (Rs 1,60,000 crore) has flowed in as FDI. “There still exist strong capital market linkages with the outside world. The slowdown in the US will initially impact the financial markets only and then may spill over to the general economy if the problem persists for a longer period,” says Naresh Takkar, MD, ICRA.

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Global investment bank Credit Suisse, in its latest report, has said non-Japan Asian (NJA) economies have in no way “decoupled” from the US, Euro and Japanese economies (G3). “Trade linkages with the G3 have grown and not shrunk in recent years,” says the report. Subir Gokarn, Chief Economist, Standard & Poor’s Asia Pacific, adds: “While there are strong linkages with the world, the Asian economies, including India, have also achieved a dynamism that makes them less dependent on the US.”

Experts are also not ruling out a spillover effect of the subprime crisis as financial institutions like Citibank, Merrill Lynch, UBS and Morgan Stanley sell assets or cut down on investments in emerging markets. “There could be a serious problem if we see another bunch of write-offs,” says Shubadha Rao, Chief Economist, YES Bank.

Then, India Inc.’s multi-billion dollar global acquisition spree (especially of large commodity-related companies like Corus and Novelis) can come back to haunt it if there is a downturn in the commodity cycle.

A rational reading of all the data points to the fact that India remains very much “coupled” to the world economy.

But there are also very strong domestic factors that will neutralise, to some extent— but not fully—any negative fallout of such linkages.

That brings us back to the question we asked at the beginning of this report: has the Indian economy really “decoupled” from the US? A reasonable, if cautious, answer will have to be both yes and no.