Friday, March 28, 2008

10 reasons why India would tide over the credit crunch with ease

  1. India’s export-to-GDP ratio has increased in recent years, it still remains below those of most other Asian economies. India will likely be the least affected Asian economy if there is a significant downturn in US imports.
  2. A huge Chunk of India remittances and exports are from oil rich Middle East. The economy of these countries are not showing any signs of slowing down due to all time high oil prices.
  3. India’s per capita consumption of oil is relatively low, and its exports which are mainly IT services are not affected much by oil prices, an Oil price shock is unlikely to upset Indian economy in a huge way.
  4. The outcome for global capital inflows into India is more uncertain, both in terms of direction and magnitude. Most likely capital inflows will be less problematic than what they have been in recent years, owing largely to the increase in global risk aversion. The hit to the economy from the drying up of capital inflows is somewhat less worrying. That is because the RBI has several means to offset the hit from significant shrinkage in full-year net capital inflows.
  5. RBI could potentially unwind MSS and reverse the hikes in CRR, thereby injecting liquidity in a non-inflationary way to offset the effect of greatly reduced capital inflows, or of even net capital outflows.
  6. The sixth pay commission report will substantially increase the spending power of Government employees in India. It will have a positive effect on domestic demand.
  7. The reduction in income tax will increase the disposable income bringing in more domestic investments into the financial markets. It will also help propel the domestic demand.
  8. An economic downturn will prompt foreign companies to look for more cost cutting options. This could spur another wave of Business and Knowledge Process Outsourcing. Also Though the BPO growth has slowed down in recent years the KPO industries in India have not been affected much by US recession and have still a lot of scope for growth. More over the reduction in spending power of US companies will force Indian IT sector to become more efficient and offer products with better value addition, which will be beneficial to the industry in the long run.
  9. The financial standing and the current results of most of the Indian companies are still positive, which puts them in a better position to face the crisis.RBI with is huge foreign exchange reserves, can tackle any short term financial risk effectively. And it still maintains the option of bringing in huge liquidity into the Indian economy by lowering interest rates.
  10. And finally Indian growing trade ties with China, SAARC countries and south Asian economies would act to stabilize the Indian economy if the US economy crumbles.

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