Impact of Roubini’s Perfect Storm Predictions on India

Indian economy is not doing well. It grew at just 5.5 percent in the June quarter. The slow growth continues from last quarter, and the rapid economic growth of the last decade can no longer be taken for granted. The political paralysis, frequent corruption and scam charges, and inability to pursue  reforms has all led to this sorry state of affairs. This week with much fanfare reform guidelines for foreign direct investment in retail and aviation were released. Let us see whether they make a difference in the long run.

The area of concern is that economist Nouriel Roubini dubbed ‘Dr Doom” for predicting 2008 financial crises, recently predicted a global perfect storm in 2013. He highlighted five factors that will derail the global economy.

If India’s internal problems continue and Roubini’s predictions become real, the dream of India becoming a super power by 2020, may just remain wishful thinking.  As there are divergent views on India’s growth story, let us take a look on the impact of these factors on Indian economy and growth.

1) Worsening debt crises in Europe

The European crises is more than a spanner in the wheels, it has the capacity to bring the global economy to its knees. With Greece, Ireland and Spain in doldrums and economist predicting a breakdown of Eurozone in near future, things couldn’t be worse. London and other euro cities are home to the biggest financial institutions and extensively interconnected with the rest of the world. The combined economies of Eurozone is the second largest in the world, hence anything going wrong here will impact the rest of the world.

A recently released FICCI report states that – “Indian companies doing business or which have invested in Europe have been adversely impacted. About 75% respondents said they have reported decline in their business prospects and also a loss of over 20% in business generation from the European region.” If a full-blown breakdown occurs, then Indian economy will definitely suffer. Though, a lot has been said about European institutions working together to bring financial stability and governments having the political will to take corrective measures, it seems doubtful. Good economies, Germany for one, may back out as its citizens may not wish to carry the burden of other countries.  Hence, Indian companies are spreading their business in Africa and Middle-East to counter the downturn of Europe.

2) Tax increases and spending cuts in US that may push the country in recession

Barack Obama inherited an economy in crises. Though the financial crises is over, the economy will take a few years to recover. Last six months economic indicators show progress . The annualized growth rate is ranging between 1-2% in 2012, a major improvement from -7% in 2009. The unemployment rate is around 8%, and property prices have risen in the last six months after 5 years.

As neither Barack Obama nor Mitt Romney has a magic wand, the possibility of US going in recession is high, specially as it is highly linked and dependent on Europe. For India, a US recession is firstly bad news for the outsourcing industry. Obama and Romney, both in their election campaigns have targeted Indian outsourcing business as the source of all problems prevailing in US job market.

Though Indian software industry exports were US $ 101 billion in revenues in the year ended March 2012, NASSCOM has stated difficulty in predicting Indian software exports for more than two quarters in uncertain conditions. India exported  merchandise goods to US for $57.8 billion in 2011 and is growing. Since majority contributions are of textiles, stones etc., the impact of recession  isn’t significant.

In respect to FDI’s, receives investments through Mauritius, Singapore etc and “According to the latest data released by the Department of Industrial Policy and Promotion (DIPP), India received foreign direct investment (FDI) worth US$ 1.33 billion in May 2012 while cumulative inflows for April-May 2012-13 stood at US$ 3.18 billion”. Hence, the impact of US recession on Indian FDI will not be significant.

India in all likelihood can survive a US recession without much impact on a stand alone basis. With Europe also spinning out of control, the scenario changes.

3) A hard landing for China’s economy

Chinese economy over the last two decades flourished with high investment in infrastructure projects and low manufacturing costs. It imported capital goods, though not consumer goods, and domestic consumption didn’t increase much. Now growth forecasts are in single digits, and focus has to shift internally due to the Eurozone crises and US recession.

As Satyajit Das mentioned in a recent blog post, the world is divided into two groups with respect to China – Sino-philia and Sino-phobia. Some pro-China model believers think China is set to become a super power. On the other hand Sino-phobic believe China is out to control the world. Hence, the perpetual predictions of China succeeding and failing. However, Das has pointed out rightly in the following words –

Nothing illustrates this better than Chinese income levels. Despite its status as the world’s second largest economy, China ranks 98 out of 181 nations in the World Bank’s ranking of GDP per capita. Based on forecasts, wealth per capita in 2016 will be only equivalent to US$13,700 against $57,300 for the US and US$48,000 for Germany. This does not take into account the massive income inequalities in China, where a large portion of the population lives on less than US$1.25 a day.

China and India suffer from the same problems of huge income disparity, over-population and poverty. The corruption in the government further distorts the situation. If Chinese economy slows down, the disparities will continue and China will have to focus internally. It does give an opportunity for India to takeover but it depends on India straightening out its internal act.

4) Further slowing down of emerging markets

The BRICS – Brazil, Russia, India, China and lately South Africa – in the last decade showed tremendous growth. They were the torch bearers of developing world. However, now it is envisaged that BRICS will be growing in single figures. With it competition from other emerging markets is heightening – Indonesia, Philippines  Vietnam etc. . On both sides India is in trouble.

Firstly, with the slower growth in emerging countries, India will lose its advantageous position. As business heads start looking at other countries for investment, the FDI will slow down. Moroever, the emerging markets provide a good cost arbitrage. For example, Philippines have taken over the call center market specially that of US, as the cultures are similar and it is cheaper than India.

As each emerging country comes up with its own unique selling proposition, the Indian industries will be impacted unless they position themselves differently. As in the BPO business, India is now attempting to position itself as knowledge managers.

Emerging markets will increase competition for India, hence gazing at the crystal ball is not going to help. India will have to tackle its poor reputation on governance, public finances, scams and democratic setup.

 5) A military confrontation with Iran.

Political pundits predict that Israel to maintain its supremacy in Middle East will bomb Iran soon. Another view is that Iran will misuse its nuclear power to foster radical Islamic activities. Iran is rapidly building stronger ties with Russia, China and Latin America. In this situation, the target is US and Europe. The crucial question is, what does a war or attack by Iran means to India.

Besides ancient cultural ties, presently Iran is the major supplier of oil to India.  India has invested in the Oil & Gas industry in Iran to ensure its export. India imports 80% of crude oil to meet its energy needs from around 30 countries. Iran caters to 11% of the total requirement.

Hence, from cultural, political and trade perspective, India is not in Iran’s first list of country targets. However, if war does break out,  India is located between Pakistan and China. China would support Iran. On the other hand, Pakistan will face the tough choice of supporting the Islamic group or US. India is far to near the epicenter of the problem to avoid the war, as it has tense relationships with both its neighbors – Pakistan and China. On the whole, India loses out if there is a war in the Middle East. Tensions in Middle East will spell trouble for Indian companies having high energy consumption as crude oil price may increase.

Closing thoughts

Risk managers need to re-evaluate country risk of India and the rest of the countries they are doing business with. Credit rating agencies are threatening to further downgrade India’s rating. With the political risks of various countries changing, some impact on import-export, supply chain, customer relationships and investor participation can be expected. Even in the recent risk reports respondents have rated geo-political risks among the highest. This is a good time to take a close look at the risk scorecard to assess changes in strategic, financial and operational risks. Strategies should be developed for the country risks identified during the country risk assessment.

References:

  1. A Global Perfect Storm – By Nouriel Roubini 
  2. Roubini sticks to 2013 ‘perfect storm’ prediction
  3. 7 economic indicators that could decide the election By Market Watch
  4. Foreign Direct Investment
  5. Indian companies facing losses in Europe: Ficci
  6. BRIC Countries Hit A Wall – Forbes India